Behavioral Finance AI is the New Accelerator for Islamic Investing.

Most of the investing world is aware that the Middle East Sovereign Wealth Funds (SWFs) are generally flush with cash to make strategic investments in their own countries and globally. With this tremendous flow of cash, Islamic Finance is quickly expanding its global footprint with the Middle East SWFs becoming some of the world’s biggest institutional investors.

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Being oil and gas-rich, the SWFs are still likely to have substantial cash reserves in the future and continue to strengthen their position as investment powerhouses. Even the Saudi Public Investment Fund (PIF) alone has stated ambitions of controlling 10% of the world’s investment holdings. The PIF is even proposing to invest $100 billion in the tech sector in the next few years to capitalize on the AI revolution.

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However, with the significant size and term of some of their domestic projects, there will be an inherent tightening of liquidity. With the reduced liquidity, we expect to see a tightening of the SWF’s methodology for funding investments and more scrutiny on which leaders are responsible for ensuring investment success and driving wealth creation.

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You can see the tightening up with organizations like the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB) working hard to develop global standards for Islamic finance to promote transparency and facilitate cross-border transactions.

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It is also important to recognize that the principles of Islamic Finance have helped the Middle East SWFs lead significant economic progress, creating wealth for generations to come. Some of the key factors are that investments must be structured on a profit and loss-sharing basis, which necessitates a higher level of governance and risk management.

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Overall, it is now even conceivable that SWF leaders will see this as a new dawn opportunity to embrace the psychological aspects of “behavioral finance” into their Islamic Finance approach. By recognizing that the financial behavior of the CEO and leadership team is the primary force creating sustainable financial value, a new paradigm exists for making investment decisions with far greater financial safety.

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In the new world of “Islamic” behavioral finance a fully informed investment decision requires an in-depth predictive analysis of the talents and financial behavior capability of the leadership team. In particular, the CEO and leadership team’s capability to add competitive value through innovation and to prudently manage financial resources. Given the world is changing so fast because of AI and technological changes, behavioral finance measurement can be used to predict which leaders have the “financial mindset” to propel their companies forward and who will drop off the cliff.

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The inherently limited fundamental financial analysis and resulting highly intuition-biased judgment do not adequately inform whether the leadership team will reach its financial objectives. That truth is evident in the fact that 90% of investment deals underperform or fail. The SWFs have not been immune from this and are at risk given so much money is invested through Western fund managers.

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Further, as Daniel Kahneman’s research shows there is a 41% variability in investment valuations by investors when assessing the same set of numbers. That happens because people see what they want to see in the numbers and let emotions take over. Given that Islamic investment principles require a higher level of transparency, such a limited financial due diligence approach does not meet the new standard that is being sought by SWFs.

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A key aspect of behavioral finance is recognizing the biases that may influence the investment decision-makers. Then, governance strategies can be implemented to mitigate the impact of behavioral biases on the outcome, thereby enabling more rational decisions. ?For instance, to what degree are they loss averse and have built in a loss-risk ratio to the risk-reward analysis? Or, to what extent is there a broadening of perspectives to limit anchoring to a particular view or experience? Or to what degree does management stop accepting the consolidation of a big winner against a pile of losers? Then, of course, addressing how investment committee decisions are made so that the authority bias is seen against groupthink and conformist behavior.

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With the higher level of ethical principles and governance naturally embedded in Islamic Finance, it is not a big leap to see how behavioral finance principles can become a new cornerstone enhancing the investment decision-making process for unlocking further wealth creation.

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In the Western World, behavioral finance has been an emerging field driven by research over the past twenty years. However, over that time, the only players to turn behavioral finance into practical reality by scientifically measuring how each person behaves at a very deep level are the Perth Leadership Institute (PLI) and DNA Behavior International. One aspect of their uniqueness is that they have been able to “behavioralize” company accounts by recasting the reported metrics with behavioral finance measurements of the leadership team, which then serve as a reliable predictor of financial success.

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With the work performed by PLI and DNA Behavior over the past 20 years, science-based AI models can now predict which CEOs and leadership teams will create financial value. Such an AI-driven approach means that the needed behavioral finance insights for making an informed decision are at the investor's fingertips and do not have to be obtained through leader participation in traditional psychometric discovery processes or simply guessed through intuition.

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As the idea of Islamic behavioral finance takes hold and is even codified and institutionalized, this emerging field of work will become more mainstream in Islamic Finance and then universities and many other fields of Islamic business and life.

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Imagine the acceleration of economic progress that will occur with the financial mindset of the key investment players understood and integrated into Islamic Finance AI.

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If you want to learn more about how financial behavior plays out in assessing leaders and corporate investment transactions, please visit: https://landing.dnabehavior.com/the-alpha-within-ebook