What Steps Do You or Your Organization Take to Identify Your Own Behavioral Biases?
Several years ago, we asked CFA Institute Financial NewsBrief readers about incorporating behavioral finance and its precepts into the investment process. Then, as now, the results showed that not many firms were formalizing behavioral finance.
In the current poll, only 12% of respondents replied that their firm has a formal process for dealing with behavioral biases. The remaining 88% believe they can produce objective analysis without explicitly implementing a behavioral process.
What steps, if any, do you or your organization take to identify your own behavioral biases?
This is probably due to the fact that most of the behavioral finance standard-bearers have spent their energies on diagnosis, not on prescription. At CFA Institute, we believe there is a large opportunity to rectify this with further research, such as John Coates’ research on a biological component of impaired decision-making.
Since behavioral finance boils down to a lack of awareness of one’s own mental processes, any technique that increases awareness of one’s mental functioning is likely to help. Investors are in luck because contemplation practices are time tested and perennially useful. Another technique is to begin documenting your investment choices and the reasoning that led to them. Record not just your purchases and sales but those securities that fall into the “analyzed but passed on” category.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
