When Models Meet Judgement: Financial decision making under uncertainty and The Model-Judgement Contingency Framework

Abstract

Management in the financial industry is traditionally understood as rational and model-based. However, research shows that decision-making in practice often involves judgement, intuition and experience; especially during periods of high market uncertainty. The study examines how financial decision-makers balance quantitative decision-support models and human judgement in practice, using a qualitative exploratory case study based on semi-structured interviews with decision-makers in the financial sector. Its scope is limited to financial firms in the greater Gothenburg metropolitan area in Sweden, and the underlying theoretical framework is based on classical financial theory, behavioural finance, and management under uncertainty. The study’s findings suggest that the relative importance of quantitative models and qualitative judgement does change under heightened market uncertainty. Uncertainty appears to increase the use of human interpretation, experience, and intuition in decision-making, especially within financial firms whose normal decision-making is only somewhat model-supported but not fully model-governed. Based on these findings, the study also proposes The Model-Judgement Contingency Framework: a framework in which financial firms can be placed on a scale from low to high baseline model reliance, and where uncertainty influences decision-making toward greater reliance on judgement. The theoretical contribution of the study is empirical findings and analysis of how financial decision making is affected by increased market uncertainty in the greater Gothenburg metropolitan area. Practically, the study contributes by providing financial firms with managerial insight into how uncertainty can influence human interpretation and model reliance in decision-making.