PRiFin - Perception of Risk in the Financial System: The Impact of Financial Innovation on the Perception-Belief-Behaviour Nexus – Preliminary Findings

Project overview

In an era when financial innovations, including FinTech, cloud banking, cryptocurrencies, and Artificial Intelligence (AI) are shaping the future of the global financial system, it has become more crucial than ever to improve our understanding of perceptions in risk-taking and risk-seeking in the financial operator’s decision-making process. In other words, due to the emergence of financial innovations, financial agents are no longer rational once the role of perceptions dominates.

PRiFin is a project that investigates from a multidisciplinary perspective the impact of financial innovation on the trade-off between financial agents’ perceptions of risk (PR) and real risk (RR). PRiFin integrates finance, macroeconomics, and psychology and employs a cutting-edge experimental economics and psychology-matrix model to explain the perception-belief-behaviour (PBB) nexus underlying this trade-off.

The aim of the PRiFin project is to investigate the complex structural and cognitive reasons that lead financial agents to underestimate risk in the presence of financial innovation, particularly in periods of prosperity.

Project objectives

1. To integrate finance, economics and psychology theories and develop main hypotheses on the PBB nexus that are relevant to the model design;

   b) To investigate, by means of an innovative experimental economics–psychology matrix model, the trade-off between financial agents’ perception of risk (PR) and real risk (RR) operating within the financial industry;

2. To develop an initial understanding of how financial innovation exacerbates this trade-off;

3. To reach some preliminary conclusions to disseminate and debate within the wider academic community, policymakers, and stakeholders.

Impact statement

The preliminary findings of this pilot study warrant a more in-depth investigation into the PBB dynamics relating to financial risk in the presence of financial innovation by means of a multidisciplinary approach to the topic. This could, in future, include elements from the fields of anthropology and business management. The project results have significant implications across a wider range of disciplines and as such, create fertile ground for the research community in promoting and developing international research collaborations. Moreover, this project promotes awareness about this topic amongst financial stakeholders, policymakers, and academics.

Also, it provides the basis for a new approach to the preparation of developing innovative policy tools and strategies for a direct impact on improving macroprudential policies. Finally, the primary purpose of the findings is to create the foundations and knowledge framework for a larger funding bid and finance an upscaled project policy-focused with the aim to explore in greater detail the relationship between misperceptions within the PBB nexus, the financial instability that could arise and the potential for economic recessions.  

Outputs

• PriFin Project Workshop and Roundtable, 18th July 2022, Techno Centre, 12:00 to 17:00, Coventry, UK. This was an hybrid event involving scholars and stakeholders. Speakers: Dr Yiquiao Sun, ECB; Dr Ekaterina Svetlova, University of Twente, Netherland; Dr Sebastian Doerr, BIS; Mr Paul Groden, CISI President – Jersey branch; Dr Mark Hannam, University of London; Dr Paola Paiardini, University of Birmingham; Dr Samir Alamad, Coventry University.
• PRiFin Research Project Report – 1st draft to be discussed at the PRiFin workshop – July 2022. Final draft published online and disseminated to the wider audience
• PRiFin blog article