Feature/OPED
Managing “Emotional Returns” in Investments is Key to Staying on Track
By Alexis Calla
In our 2019 outlook, one of the key messages that we have constantly communicated over the years is the importance of diversification. While we get the sense that some of our investors have been heeding this message, it is also clear that some are yet to be convinced.
This year, in conversations with some clients, we introduced the idea of “emotional” investment returns, highlighting that the way you implement diversification can have an impact on how your investment returns affect you. This can, in turn, impact your future investment decisions which could be detrimental to your long term financial returns. This idea clearly resonated with them and we decided to share it more broadly.
One of my favourite books is Daniel Kahneman’s Thinking Fast and Slow. Kahneman is a Nobel Prize winner for his research (with Amos Tversky) into behavioural biases. One of their theories is “prospect theory”, which states that “the pain of losing is 2 times greater than the pleasure of winning”. Let’s examine the recent performance of a couple of different asset classes in recent times to demonstrate the importance of this finding.
One of the most popular asset classes in 2018 was US equities, which rose 11.2% from its start of the year level of 5212 to its 5794 peak-level in September, before falling 14.0% from the peak to its year-end level of 4984. From a “classic financial” point of view, if this was the person’s only investment (let us say $10,000), the loss would have been 4.4%. Not ideal, but hardly the end of the world. However, from an “emotional” point of view, it was probably a lot worse. Taking Kahneman’s 2:1 emotional cost/benefit ratio into account, the investor would have experienced 11.2 gain in ‘emotional points’ followed by a 28 points loss (2 multiply by 14), before arriving at a net loss of 8.8 “emotional points”. What an emotional roller coaster!
But what about an investor who got intrigued by our call for diversification?
There are two potential ways to achieve this. One way is to invest equally in two different funds. The second is to invest in a fund that has a 50:50 split between the two asset classes. While they are financially equivalent (assuming the fund manager invests in the same underlying assets), emotionally they can be very different.
To work fully, financially as well as emotionally, diversification requires investors to look at their investments as a pool and not as a set of separate items. Another Nobel Prize winner, Richard Thaler, established that many of us have a tendency called “mental accounting” that often prevent us from looking at things in totality. What this means is we all have the tendency to look at each individual line of an investment portfolio. This can influence us to make sub-optimal decisions.
Developing the above analysis further, let’s take the example of an investor who decided to split her US equity investment, allocating $5,000 to global bonds. On this second investment, she would have made a loss of 1.9% (loss of 3.8 “emotional points”) through to the peak in the US stock market and then a gain of 0.7% (gain of 0.7 “emotional points”) in the remainder of the year for a net loss of 2.4 “emotional points” over the year. The combination of the two investments would have been a 4.6% gain through to the peak in the US stock market and then a loss of 7.1% in the remainder of the year for a net loss of 2.8% over the year. But “mental accounting” would have prevented our investor from aggregating ‘emotional’ returns, the equity allocation remaining a painful 8.8 “emotional points” loss.
However, for the investor who decided to invest $10,000 in one fund that diversified across both US equities and global bonds, her return would have been 4.6% (4.6 “emotional points”) through September and then a loss of 7.1% (-14.2 “emotional points”) in the remainder of the year for a net -5.6 “emotional points” loss.
As you can see, the financial return is clearly the same at each point, but the ‘emotional’ returns can be very different if the investor mentally accounts for each individual investment.
When using a balanced product, the reduction in the ‘emotional’ pain during the equity market fall (-14.2 points vs -28 points) far outweighs the loss of ‘emotional’ gain up to the peak period (4.6 points vs 11.2 points).
The risk of ignoring the investor’s ‘emotional’ pain would be so great that they would sell what is hurting them. Not only could this distract them from their long-term objectives, but in this instance, it would also have meant selling equities just before the strong rally we subsequently saw since the turn of the year (+11.8%).
Helping our clients make less biased investment decisions is one of our key objectives at Standard Chartered Bank. The above academic research, together with our day-to-day experience with clients, suggests investors should allocate a significant portion of their investments to core diversified holdings as we believe this will help them manage their emotions and stay on track when it comes to their long-term financial goals.
Alexis Calla is Chief Investment Officer at Standard Chartered Bank.
By Luke Kyohere
The global payments landscape is undergoing a rapid transformation. New technologies coupled with the rising demand for seamless, secure, and efficient transactions has spurred on an exciting new era of innovation and growth. With 2025 fast approaching, here are important trends that will shape the future of payments:
1. The rise of real-time payments
Until recently, real-time payments have been used in Africa for cross-border mobile money payments, but less so for traditional payments. We are seeing companies like Mastercard investing in this area, as well as central banks in Africa putting focus on this.
2. Cashless payments will increase
In 2025, we will see the continued acceleration of cashless payments across Africa. B2B payments in particular will also increase. Digital payments began between individuals but are now becoming commonplace for larger corporate transactions.
3. Digital currency will hit mainstream
In the cryptocurrency space, we will see an increase in the use of stablecoins like United States Digital Currency (USDC) and Tether (USDT) which are linked to US dollars. These will come to replace traditional cryptocurrencies as their price point is more stable. This year, many countries will begin preparing for Central Bank Digital Currencies (CBDCs), government-backed digital currencies which use blockchain.
The increased uptake of digital currencies reflects the maturity of distributed ledger technology and improved API availability.
4. Increased government oversight
As adoption of digital currencies will increase, governments will also put more focus into monitoring these flows. In particular, this will centre on companies and banks rather than individuals. The goal of this will be to control and occasionally curb runaway foreign exchange (FX) rates.
5. Business leaders buy into AI technology
In 2025, we will see many business leaders buying into AI through respected providers relying on well-researched platforms and huge data sets. Most companies don’t have the budget to invest in their own research and development in AI, so many are now opting to ‘buy’ into the technology rather than ‘build’ it themselves. Moreover, many businesses are concerned about the risks associated with data ownership and accuracy so buying software is another way to avoid this risk.
6. Continued AI Adoption in Payments
In payments, the proliferation of AI will continue to improve user experience and increase security. To detect fraud, AI is used to track patterns and payment flows in real-time. If unusual activity is detected, the technology can be used to flag or even block payments which may be fraudulent.
When it comes to user experience, we will also see AI being used to improve the interface design of payment platforms. The technology will also increasingly be used for translation for international payment platforms.
7. Rise of Super Apps
To get more from their platforms, mobile network operators are building comprehensive service platforms, integrating multiple payment experiences into a single app. This reflects the shift of many users moving from text-based services to mobile apps. Rather than offering a single service, super apps are packing many other services into a single app. For example, apps which may have previously been used primarily for lending, now have options for saving and paying bills.
8. Business strategy shift
Recent major technological changes will force business leaders to focus on much shorter prediction and reaction cycles. Because the rate of change has been unprecedented in the past year, this will force decision-makers to adapt quickly, be decisive and nimble.
As the payments space evolves, businesses, banks, and governments must continually embrace innovation, collaboration, and prioritise customer needs. These efforts build a more inclusive, secure, and efficient payment system that supports local to global economic growth – enabling true financial inclusion across borders.
Luke Kyohere is the Group Chief Product and Innovation Officer at Onafriq
In a heartfelt statement released today, the Conference of Nigeria Political Parties (CNPP) has extended its warmest congratulations to Ghana’s President-Elect, emphasizing the importance of learning from Ghana’s recent electoral success as Nigeria gears up for its 2027 general elections.
In a statement signed by its Deputy National Publicity Secretary, Comrade James Ezema, the CNPP highlighted the need for Nigeria to reclaim its status as a leader in democratic governance in Africa.
“The recent victory of Ghana’s President-Elect is a testament to the maturity and resilience of Ghana’s democracy,” the CNPP stated. “As we celebrate this achievement, we must reflect on the lessons that Nigeria can learn from our West African neighbour.”
The CNPP’s message underscored the significance of free, fair, and credible elections, a standard that Ghana has set and one that Nigeria has previously achieved under former President Goodluck Jonathan in 2015. “It is high time for Nigeria to reclaim its position as a beacon of democracy in Africa,” the CNPP asserted, calling for a renewed commitment to the electoral process.
Central to CNPP’s message is the insistence that “the will of the people must be supreme in Nigeria’s electoral processes.” The umbrella body of all registered political parties and political associations in Nigeria CNPP emphasized the necessity of an electoral system that genuinely reflects the wishes of the Nigerian populace. “We must strive to create an environment where elections are free from manipulation, violence, and intimidation,” the CNPP urged, calling on the Independent National Electoral Commission (INEC) to take decisive action to ensure the integrity of the electoral process.
The CNPP also expressed concern over premature declarations regarding the 2027 elections, stating, “It is disheartening to note that some individuals are already announcing that there is no vacancy in Aso Rock in 2027. This kind of statement not only undermines the democratic principles that our nation holds dear but also distracts from the pressing need for the current administration to earn the trust of the electorate.”
The CNPP viewed the upcoming elections as a pivotal moment for Nigeria. “The 2027 general elections present a unique opportunity for Nigeria to reclaim its position as a leader in democratic governance in Africa,” it remarked. The body called on all stakeholders — including the executive, legislature, judiciary, the Independent National Electoral Commission (INEC), and civil society organisations — to collaborate in ensuring that elections are transparent, credible, and reflective of the will of the Nigerian people.
As the most populous African country prepares for the 2027 elections, the CNPP urged all Nigerians to remain vigilant and committed to democratic principles. “We must work together to ensure that our elections are free from violence, intimidation, and manipulation,” the statement stated, reaffirming the CNPP’s commitment to promoting a peaceful and credible electoral process.
In conclusion, the CNPP congratulated the President-Elect of Ghana and the Ghanaian people on their remarkable achievements.
“We look forward to learning from their experience and working together to strengthen democracy in our region,” the CNPP concluded.
By Kenechukwu Aguolu
The proposed tax reform, involving four tax bills introduced by the Federal Government, has received significant criticism. Notably, it was rejected by the Governors’ Forum but was still forwarded to the National Assembly. Unlike the various bold economic decisions made by this government, concessions will likely need to be made on these tax reforms, which involve legislative amendments and therefore cannot be imposed by the executive. This article highlights the purposes of taxation, the qualities of a good tax system, and some of the implications of the proposed tax reforms.
One of the major purposes of taxation is to generate revenue for the government to finance its activities. A good tax system should raise sufficient revenue for the government to fund its operations, and support economic and infrastructural development. For any country to achieve meaningful progress, its tax-to-GDP ratio should be at least 15%. Currently, Nigeria’s tax-to-GDP ratio is less than 11%. The proposed tax reforms aim to increase this ratio to 18% within the next three years.
A good tax system should also promote income redistribution and equality by implementing progressive tax policies. In line with this, the proposed tax reforms favour low-income earners. For example, individuals earning less than one million naira annually are exempted from personal income tax. Additionally, essential goods and services such as food, accommodation, and transportation, which constitute a significant portion of household consumption for low- and middle-income groups, are to be exempted from VAT.
In addition to equality, a good tax system should ensure equity and fairness, a key area of contention surrounding the proposed reforms. If implemented, the amendments to the Value Added Tax could lead to a significant reduction in the federal allocation for some states; impairing their ability to finance government operations and development projects. The VAT amendments should be holistically revisited to promote fairness and national unity.
The establishment of a single agency to collect government taxes, the Nigeria Revenue Service, could reduce loopholes that have previously resulted in revenue losses, provided proper controls are put in place. It is logically easier to monitor revenue collection by one agency than by multiple agencies. However, this is not a magical solution. With automation, revenue collection can be seamless whether it is managed by one agency or several, as long as monitoring and accountability measures are implemented effectively.
The proposed tax reforms by the Federal Government are well-intentioned. However, all concerns raised by Nigerians should be looked into, and concessions should be made where necessary. Policies are more effective when they are adapted to suit the unique characteristics of a nation, rather than adopted wholesale. A good tax system should aim to raise sufficient revenue, ensure equitable income distribution, and promote equality, equity, and fairness.
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