This is not the first time Werner de Bondt, Professor of Behavioral Finance at DePaul University in Chicago, has been to Stockholm. For a few months in 2001, he was a guest professor at the Stockholm School of Economics.He waxes lyrical about the city’s beauty: ‘Stockholm is magnificent, beautiful and, with its archipelago, unique. I’ve been back several times and have both friends and colleagues in Stockholm and Sweden.’
This time, the evaluation of the Mistra-funded Sustainable Investments (SI) research programme ahead of a second phase has brought him to Stockholm. In de Bondt’s opinion, SI’s two subprojects together make up a unique research programme. This is because they are both about investigating the financial and capital markets, how these relate to sustainable investments, and what impediments stand in the way of more investors taking sustainability criteria into account.
Key concepts
His own research is empirically based and oriented towards understanding the dynamics of the financial markets and the connections with investors’ and financial analysts’ psychology and decision-making — in brief, their behaviour in the financial markets. He is one of the leading experts in what is known as ‘behavioural finance’.
‘I suppose I must be the only, or at least the first, person in the States with PhDs in both psychology and economics,’ he says.
Werner de Bondt is interested in key concepts, such as limited rationality in decision-making. For example, people tend to exaggerate the importance of new information, and incline towards wishful thinking and biased assessment of risks.
‘Many of our decisions are based on what others have said or done, regardless of relevance to our own decisions. All this plays a part when people take decisions, whether it’s a matter of individuals deciding about their household finances or the decisions of financial analysts or investors,’ de Bondt says.
Psychological aspects
After finishing his economics degree, de Bondt worked briefly in the business sector. It was the gap between what was taught at university and reality that captured his interest in the psychological aspects of various financial decisions.
‘I’m convinced that if financial theory is to have any relevance in the future it must pay more attention to how investors actually behave and what the mechanisms underlying their behaviour are.’
Initially, when de Bondt presented his results, he was met with scepticism and suspicion. But these reactions have steadily been superseded by acceptance and ‘behavioural finance’ is now a common concept, used by both scientists and practitioners. These days, he is a sought-after lecturer and advisor, and he hopes that the research findings may make it easier for people to take more rational decisions concerning their future.
‘We’re living in a world in which more and more people take responsibility for their own future, financial security and protective social network. In the West, our social security used to consist in several generations living together, but we don’t live like that any more and this has placed the responsibility more on every individual,’ he says.
Sustainable investments
For sustainable investments to penetrate the financial markets, changed behaviour in the markets and a desire among companies and investors alike are required, according to Werner de Bondt. He is not averse to the idea of supporting the process with some legislation, but points out that equally important, at least, are current research results showing that sustainable investments entail no extra costs.
‘Nowadays, companies are very much aware that they can’t afford an environmental disaster like the one caused by the Exxon Valdes oil tanker in 1989, when some 37,000 tonnes of oil spilled into Prince William Sound in Alaska. A disaster like that is devastating both for the environment and for a company’s reputation. This fact and research results that provide evidence that sustainable investments can be profitable are prompting a growing number of people to take sustainable investment decisions,’ says Werner de Bondt.
