Poll: Have Behavioral Finance Precepts Improved Your Investment Results?
In a poll conducted earlier this week in the CFA Institute Financial NewsBrief, we asked readers whether implementing behavioral finance principles in their investment practice has meaningfully improved results.
Has implementation of behavioral finance precepts into your investment practice meaningfully improved your results?
Among the three possible answers given, 48.25% of respondents indicated that they have not implemented behavioral finance at their investment firms. Although this may seem surprising, a consistent criticism of behavioral finance is its lack of a unifying theory. In other words, although behavioral finance observations of cognitive biases are descriptive, they do not necessarily suggest how to take advantage of these biases or how to avoid them.
That said, a majority of respondents (51.75%) stated that they have incorporated behavioral finance tenets at their investment firms. Among this group, 44% reported success in implementation, whereas 7.75% stated that they have not achieved success.
Perhaps recent works by Greg B. Davies and Arnaud de Servigny (Behavioral Investment Management) and Daniel Kahneman (Thinking, Fast and Slow) will not only increase implementation of behavioral finance but also improve results. Also, CFA Institute is hosting a forum, Behavioral Finance: From Theory to Practice, that may aid interested practitioners.
Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.
Our firm, AthenaInvest, manages fund overlay, stock, and tactical ETF portfolios exclusively using behavioral concepts. We have generated strong track records in each of these areas. We think of it as harnessing the market’s emotions by building portfolios based on the measurable and persistent price distortions created by emotional crowds. But as is well known, to implement such an approach and then attract and retain clients, it is important to redirect your own emotions as well as mitigate the impact of client emotions on their portfolios. Three critical steps: Redirect, Harness, and Mitigate. I believe Behavioral Finance is the wave of the future and is in the process of replacing MPT. If interested in learning more, see “The Behavioral Market” at SSRN: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2210032
Hello Mr. Howard,
Thank you for your comments above. Similar to physics’ search for a unified field theory that unites both Newtonian physics with quantum physics, finance has been looking to unite its two competitors for the throne in a unified theory. That is, one that unites the rational and irrational in a way that describes what we actually see in investment markets. Another important criterion is that whatever theory is developed allows for accurate predictions to be made. Such a theory seems elusive currently, though there are some interesting new approaches. One such theory I mentioned in the commentary above: Behavioral Investment Management.
Best wishes for success to you and your firm,
Jason