The role of behavioural finance in successful financial services SMEs

Abstract

The purpose of this research is to discover some of the main findings the field of behavioural finance can provide for entrepreneurs in the financial services industry. Behavioural finance is a rapidly growing area that deals with the influence of psychology on the behaviour of entrepreneurs in decision-making. The researcher will focus on six heuristics and biases that entrepreneurs are seemingly prone to exhibit. Firstly, entrepreneurs tend to be overconfident. Secondly, the manner in which a problem is framed will influence the choice that is made. Thirdly, entrepreneurs make decisions on what information is available to them. Fourthly, entrepreneurs exhibit loss aversion. Fifthly, entrepreneurs tend to separate their money into several mental accounts. Finally, entrepreneurs tend to form judgment on stereotypes. The general objective of the research study has been to understand and evaluate the effect of behavioural heuristics and biases on entrepreneurs in their financial management. The study embraced the following aspects: ■ A literature study; ■ Empirical research by means of a structured questionnaire. The findings of the questionnaire were used to understand the concepts of these heuristics and biases in a South Africa environment (a group in the North West Province) in the financial services industry. All the research in the literature was done internationally and the challenge was to see a South Africa perspective on these heuristics and biases. The results have shown that entrepreneurs do manifest these heuristics and biases in their decision-making. On the strengths of the results, entrepreneurs should be conscious of the use of heuristics and biases in decision-making. The researcher recommends that entrepreneurs must understand these heuristics and biases, and they must be aware of all the heuristics and biases that they are prone to before they make important decisions.