As clients navigate complex markets and increase uncertainty, financial advisors are rethinking how to guide investment behaviour. Traditional economic models have replaced behavioral finance, in which psychological and social factors, in particular social norms play a powerful role. Understanding how these norms affect risk taking helps advisers coordinate strategies, build trust and drive better client outcomes.
What are social norms? Social norms are generally implicit expectations or shared understandings that affect what people consider acceptable behaviour. Whether descriptive (what people believe others do) or injunction (what people believe others expect), social norms have the power to shape perceptions, attitudes, and behaviors. For financial advisors, understanding these dynamics is important to creating strategies that not only align with client goals but also encourage confidence and positive decision-making.
This blog explores how social norms influence investment behavior, particularly through interactions with psychological mediators such as investment experience, risk tolerance, attitudes, subjective norms, and perceived behavioral control. It also highlights how these insights can be leveraged by financial advisors to build stronger relationships and drive better outcomes for clients.
Social norms in behavioral finance
At the heart of behavioral finance is the perception that human behavior often deviates from the rational and usefulness maximization models proposed by classical economics. Social norms influence decision-making by providing clues about what is considered acceptable or expected behavior as part of this framework of action.
- Descriptive norms guide an individual based on what others are observing what they are doing. For example, if you see a peer who allocates the majority of your portfolio to dangerous assets, they may be encouraged to do the same.
- Injunctive norms exert an influence by showing social or group expectations. Investors may feel forced to comply with perceived standards within professional and social circles, even if they contradict natural risk preferences.
The importance of social norms is particularly evident in complex decisions such as investing in dangerous assets such as stocks where uncertainty and information asymmetry depends on external cues.
Mitigated mediation analysis: insights into investor behavior
My doctoral research paper sheds light on how social norms affect the intention to invest in dangerous assets through three underlying processes.
1. Attitude towards dangerous assets – The degree to which an individual views dangerous investments positively or negatively.
2. Subjective norms – Recognizing expectations from others regarding risky investment decisions.
3. Perceived behavioral control – Confidence that individuals feel in their ability to successfully implement investment decisions.
However, these underlying processes in which social norms influence decisions to invest in dangerous assets are not uniform. They vary based on the client’s investment experience and level of risk tolerance. A deeper dive into the interactions between social norms, investment experiences, and risk tolerance reveals several important patterns of behavior.
- Attitude towards dangerous assets Low-level investment experience has been the most impacted, High levels of risk tolerance. These individuals often lack the technical knowledge to make independent decisions and therefore rely heavily on social cues. By observing peers with similar characteristics successfully invest in risky assets, they develop a more positive attitude towards taking similar behaviors.
- Subjective norms Play a more important role in medium-level investment experience and Low level of risk tolerance. For these clients, perceived social expectations can encourage or prevent them from coming out of their comfort zone. These clients may pressure them to fit social or peer expectations, but they are prone to hesitation in order to avoid risk. Their investment decisions are more likely to be influenced by perceived approvals or approvals from trustworthy sources, such as financial advisors and influential peers.
- Perceived behavioral control It is most influential at a high level of both investment experience and risk tolerance. Experienced and risk-resistant investors feel empowered when they recognize themselves as capable of making informed decisions. Social norms strengthen confidence, especially when they align with personal investment goals and knowledge.
Four practical strategies for financial advisors
By understanding how social norms interact with investment experience and risk tolerance, financial advisors provide a powerful framework for impacting client behavior. Here are four practical strategies:
1. Effectively segment your clients. Advisors should classify clients based on their level of investment experience and risk tolerance. For example, beginner investors with high risk tolerance may require a different communication strategy than seasoned investors with low risk tolerance.
2. Utilize social evidence for beginner investors. For clients with limited investment experience, emphasizing peer behavior can positively shape attitudes. Case studies, testimony, or data showing how similar individuals benefited from investing in high-risk assets can build trust and promote action.
3. Address subjective norms of hesitant investors. Risk aversion clients with moderate experience are often guided by expected expectations. Advisors can create a sense of community through investor networks and peer forums. Clients can help others navigate similar decisions well.
4. Provide data and tools for experienced investors. Risk tolerance value control and trust with clients with highly invested experience. Advisors should focus on providing sophisticated tools, personalized analyses, and actionable insights that align with goals, and enhancing perceived behavioral control.
A call to action
The integration of behavioral financial insights, in particular the power of social norms, is no longer an option for financial advisors. As clients demand more personalized and overall guidance, they provide powerful ways to shape behavior and improve outcomes by understanding how social norms interact with factors such as investment experience and risk tolerance.
For advisors who can balance behavioral insights and technical expertise, there are two payoffs. Stronger client relationships and greater differentiation in an increasingly competitive industry. It’s time to embrace standard effects and rethink how it will affect your investment decisions.
