Battling Behavioural Biases

Understanding how the mind can help or hinder investment success is a cornerstone of successful fund management. Increasingly, investors are using knowledge about investment biases to design better investment solutions and gain an advantage over the rest of the market.

In this vein, one of the key philosophies driving MATR is the group’s emphasis on disciplined investment thinking. The managers don’t rely on external research and combat groupthink; to achieve this, they have a 25-strong team of experts that work together within a structured investment framework to develop independent views.

Here, John Roe, Head of Multi-Asset Funds at LGIM, details the actions that the team embeds into the investment process that help to combat behavioural biases and mental shortcuts: a flexible team, structured decision-making process and dedication to improving confidence calibration.

FLEXIBLE FRIENDS

Diversity of thought is central to effective decision making, and as such it is an important argument for greater diversity in investment teams. It is not enough to just hire the right people, however; teams must also make the most of every person, which means ensuring all voices are heard. But that is easier said than done.

Large groups are predisposed to a number of biases: authority bias, for instance, whereby decisions are overly impacted by senior individuals; or shared information bias, when more time is spent discussing topics with which the group is already familiar, encouraging a narrow focus and consensus views.

Musical chairs

To limit the risk of overemphasising the most senior views and biasing the team towards how those views are framed, we rotate the chair person at our weekly brainstorming meetings and encourage topics from across the team.

For similar reasons, we also rotate who contributes to certain parts of our investment process. The agenda also changes to help combat anchor and adjustment problems, where the first item of the day tends to become overemphasised (the anchor) and insufficiently deviated from (the adjustment).

The stupidity of crowds The benefit of group decision-making is often lauded as ‘the wisdom of crowds’. The average guess from a crowd of people for the number of jelly beans in a jar tends to be close to the correct number, even if many individual guesses are poor.

When it comes to investing, however, market pricing already reflects the average view of thousands of investors.

Crowd-based decisionmaking within the team leads to very similar views and stops us from finding mispriced opportunities. With this in mind, we implement flexible, diverse and small (3-6 people) investment discussion groups that are likely to yield different perspectives on the issue in question.