Overconfidence
The most commonly sited behavioural bias associated with overconfidence is that clients show too much trading activity. This may be something that can be measured at individual firm level.
The study which he sites (which I have heard of the result but not yet read) is `Boys will be boys' which shows evidence of the overconfidence in males feeding through to excessive trading which leads to underperformance.
Representativeness
This bias leads to people making judgements based on stereotypes... eg. assuming a fund will outperform because it has a certain style, and that type of style outperforms in certain circumstances. Another form that it shows up in is `The Law of Small numbers' otherwise known as the `Gambler's Fallacy'... where people assume a pattern from a very small selection. This could apply to the way funds are judged on short term performance rather than processes and philosophy.
Anchoring and Adjustment
People base their expectations on an anchor, so if a fund has performed in a certain way regularly, that is what they expect the next time. This could maybe apply to expectations of return where someone has lived through a high inflationary period, or a bull market.
Cognitive Dissonance
This is the most interesting bias. Pompian looks at the way we respond when our actions and our beliefs conflict. Do we change our actions, change our beliefs, or change our perception of our actions?
This starts to genuinely delve into the psychologist's space... The advice he gives when it becomes obvious that your response to this bias is negatively affecting you is...
`If you think you may have made a bad investment decision, analyze the decision; if your fears prove correct, confront the problem head-on and rectify the situation'
Posts
No comments:
Post a Comment