Personal Finance Decisions with Untruthful Advisors: An Agent-Based Model

Abstract

Investors usually resort to financial advisors to improve their investment process until the point of complete delegation on investment decisions. Surely, financial advice is potentially a correcting factor in investment decisions but, in the past, the media and regulators blamed biased advisors for manipulating the expectations of naive investors. In order to give an analytic formulation of the problem, we present an Agent-Based Model formed by individual investors and a financial advisor. We parametrize the games by considering a compromise for the financial advisor (between a sufficient reward by bank and to keep her reputation), and a compromise for the customers (between the desired return and the proposed return by advisor), and incorporating the social psychological concepts of truthfulness and cognitive dissonance. Then we obtain the Nash equilibria and the best response functions of the resulting game. We also describe the parameter regions in which these points result acceptable equilibria. In this way, the greediness/naivety of the customers emerge naturally from the model. Finally, we focus on the efficiency of the best Nash equilibrium.