It is not the first time that Werner de Bondt, Professor of Behavioral Finance at DePaulUniversity in Chicago, is in Stockholm. For a few months in 2001 he was a guest Professor at the Stockholm School of Economics, and he speaks enthusiastically about the city´s beauty. “Stockholm is magnificently beautiful, and unique with its archipelago. I have returned many times, and have both friends and colleagues in Stockholm and Sweden," he says. This time it is an evaluation of the Mistra-financed research programme Sustainable Investments (SI) as it approaches a second programme phase that has brought de Bondt to Stockholm. He believes that SI´s two sub-programmes combine into a unique research programme, in that they both explore finance and capital markets and their relationship to sustainable investments, as well as the barriers that stand in the way of more investors taking sustainability criteria into consideration.
Psychology
His own research is empirical, focused on understanding the dynamics of financial markets and the connection to investors´ and financial analysts´ psychology and how they make financial decisions. In short: how they behave on the financial market. He is a prominent figure in what is known as Behavioral Finance. “I am probably the only, or at least the first, person in the United States with doctoral degrees in both psychology and economics," he says.
Werner de Bondt is interested in key concepts such as limited rationality in decision making. For example, that people tend to exaggerate the importance of new information, inclinations toward wishful thinking, and biased assessments of risk. “Many of our decisions are based on what other people have said or done, whether or not this is relevant for our own decisions. All of this comes into play when people make decisions, regardless of whether it is about an individual´s decisions regarding the household or a financial analyst´s or investors´ decisions," he says.
Psychological aspects
After completing his economics degree, de Bondt worked for a short period of time in the corporate sector. It was the gap between what was taught at the university and reality that sparked his interest in the psychological aspects of financial decision making. “I am convinced that if financial theory is to have any relevance in the future it must pay more attention to how investors actually behave and which mechanisms lie behind this," says de Bondt.
In the beginning, when he presented his results he was met with skepticism and suspicion. But after a while suspicion has been replaced with acceptance, and many — both researchers and practitioners — refer to what is called Behavioral Finance. Today de Bondt is a sought-after speaker and advisor. He hopes that his research results can help people to make more rational decisions about their future. “We live in a world where more and more people are taking responsibility for their future, their economic security and their social safety net. In the western world, our social safety used to come from the fact that we lived together for several generations. We don´t live that way anymore, which means that more responsibility lies with each individual," he says.
Sustainable investments
According to Werner de Bondt, for sustainable investments to penetrate the market requires behavioral change on the financial market and desire amongst both companies and investors. He is not foreign to the idea of supporting that process with laws, but he points out that current research results that show that sustainable investments do not result in additional costs are at least as important. “Companies today are so aware that they can´t afford an environmental catastrophe, like the one caused by the Exxon Valdes oil tanker in 1989 when several hundred tons of oil spilled out into Prince William Sound in Alaska. Such catastrophes are devastating for both the environment and for a company´s reputation. That, in combination with research results that support the conclusion that sustainable investments can be profitable, speaks for more and more companies and investors making sustainable investment decisions," says Werner de Bondt.
