Practical analysis for investment professionals
11 February 2016

Behavioral Biases: What Is the Weakest Link in the Investment Profession?

Emotions are often seen as dangerous forms of weakness. Yet studies show that in everything we do, in life as well as in the investment profession, “thoughts, feelings, and actions . . . are inextricably linked at both the mental and biochemical levels”.

The mechanism of incentive and fear makes investing an inherently emotional process. The demands of specific investment decision-making roles can evoke differing emotions and behavioral biases in those involved. A sell-side analyst’s conflict-of-interest dilemma, for example, may require dealing with a qualitatively different set of behavioral pitfalls than that of a portfolio manager. Similarly, the behavioral biases that a sell-side analyst may often encounter — dissonance, for example — might be far removed from, say, the overconfidence that a portfolio manager may regularly confront.

How vulnerable are the various classes of investment decision makers to behavioral biases? Is there a difference in the degree to which they are susceptible?

To understand investor opinion on these questions, we administered a survey to readers of CFA Institute Financial NewsBrief to decipher which class of investment decision maker is the most vulnerable to behavioral biases. Though every role in the investment chain is prone to bias, the survey results indicate that those who more frequently encounter short-term pressures, such as retail investors reacting to market swings, are more susceptible than those who don’t interact as regularly with such phenomena.


Which class of investment decision makers is the most vulnerable to behavioral biases?

Which class of investment decision makers is the most vulnerable to behavioral biases?


Equal Vulnerability

A decisive plurality (47%) of the 628 respondents said that no class of investment professionals is more or less vulnerable than any other. This response could be interpreted in two ways: Participants may simply be reflecting the actual reality. Or they may be displaying overconfidence or some other bias, having underestimated the susceptibility inherent in their particular roles and simultaneously overestimating it in those of others. The survey results tend to support the latter conclusion, as a 53% majority stated that different investment classes are prone to varying degrees of behavioral biases

Investment Advisers

One in five of the respondents — the second largest proportion — indicated that investment advisers are the most susceptible of four classes. It is true that in the investment chain investment advisors are the closest to the retail customer. There is also ample evidence that such customers, given their relative lack of experience, tend to exhibit more behavioral biases that could in turn evoke them in investment decision makers.

Sell-Side Research Analysts

Sell-side research analysts were selected by 16% of participants. Those on the sell-side can be pressured by their firm’s investment banking and brokerage divisions and often serve at least two masters: their investment banking and brokerage divisions as well as the investor clients who read their recommendations. Compared to other players in the investment chain, the sell-side analyst community could thus be more likely to succumb to behavioral biases like cognitive dissonance and herding.

Hedge Fund Managers

Hedge fund managers are the most vulnerable investment class according to 11% of respondents, the third largest cohort in this survey. Hedge funds service high-net-worth and institutional clients. Given the increased knowledge and experience levels of these customers relative to retail investors, it is plausible that hedge fund managers are less influenced by their behavioral biases.

Portfolio Managers

With 6% of the vote, portfolio managers are the least prone to behavioral biases according to respondents. This is not so surprising given that, as a class, portfolio managers are likely to have the least amount of client contact.

So What Do We Do?

Everyone in the investment chain can be influenced by emotional and behavioral flaws. It is important, therefore, to be aware of the repeated behavioral pitfalls that we may encounter in our investment careers and devise control mechanisms to overcome them.

Do you want to participate in future polls? Sign up for the CFA Institute Financial NewsBrief.

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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.

About the Author(s)
Shreenivas Kunte, CFA

Shreenivas Kunte, CFA, is director of content at CFA Institute, where he contributes financial market insights about India and the developed world. Previously, he taught at and managed SP Jain’s Trade and Applied Research lab, which he helped found. Kunte also served as a country trading strategist at Citigroup’s Tokyo office. He actively contributes to the development sector in India and is an external research scholar at the Indian Institute of Technology Bombay.

Ethics Statement

Beyond the easier to understand, important codes of conduct, “Ethics” for me is awareness; an endeavor for right thought and action.

11 thoughts on “Behavioral Biases: What Is the Weakest Link in the Investment Profession?”

  1. Well, Everyone in the investment chain can be influenced by emotional and behavioral flaws, it would have been more interesting to see if there is a differentiation between equity side and the credit side of analysts….

    1. Shreenivas Kunte, CFA says:

      Many thanks for reading the post and for the comment. Yes, all of us carry and nurture behavioral flaws – these in turn are influenced by the environment we work in. A distinction between equity and credit can provide additional insight.

  2. Shreenivas Kunte, CFA says:

    Many thanks for reading the post and for the insightful feedback. Yes, all of us are vulnerable to behavioral biases. But a specific professional role can expose us to certain quirks more. Separating out equity and credit roles can provide another level of awareness.

  3. michael demarco says:

    Looking at this as the “role” of the decision-maker misses the point. The almost stereo typical difference between equity professionals and fixed income professionals is at the heart of these behavioral differences. Perhaps there’s been academic research on the subject. If so, I’d be very interested in some citations.

    1. Shreenivas Kunte, CFA says:

      Many thanks for the interest in this post. Yes, the investment profession has a number of specializations – each of these specializations/categorizations influence the nature of investment activity. “Equities vs fixed income” is an important asset class based categorization. The other categorization is to do with the functional aspect (within or across asset classes) that this poll has tried to focus on. Unfortunately, I have not come across specific academic research that is being sought.

  4. Let’s start with the basics, shall we? Nothing in economics, finance or especially portfolio management of has any independent, empirical validity. The basic standards or probity and truthfulness found in other professions will never occur in any economics based work – especially portfolio management. the little peer-review evidence, tat does exist roundly debunks skill over chance in professional investment returns. Much of this reserch is suppressed, of course.

    For example. “…no evidence that financial experts are making better investment decisions: they do not outperform, do not diversify their risks better, and do not exhibit lower behavioral biases.” https://richandco.wordpress.com/2015/11/05/oh-oh-no-evidence-that-financial-experts-are-making-better-investment-decisions-they-do-not-outperform-do-not-diversify-their-risks-better-and-do-not-exhibit-lower-behavioral-bia/

    In fact, the only truthful claims that can be made about behavior, of any kind, must be based in the physiology of the brain, of course. Duh…

    In fact, the premises of this piece have little evidence basis, if any. The role of so-called “emotions”, in any species, is unclear related to behavior. At best, and it is unproven, emotions appear to be correlated and epiphenomenal to behavior -contrary to pop(ular) culture and CFA folklore.

    Finally, how could a professional aricle not include ANY citations or references to peer-reviewed data and research!? Where are an editor and fact-checker when we, readers, need them?

    1. Shreenivas Kunte, CFA says:

      Many thanks for the interest in this blog and for the feedback. Comprehensive academic research across investment professions has not had a citing at least across the top journals.

  5. Anil Neerukonda says:

    Behavioral biases are very important to be properly understood by portfolio managers, analysts, traders and all types of investors. In fact, almost everyone who looks at the ‘market as a guide’ tend to be influenced by their emotions rather than by logic. Apart from overconfidence and consensus comfort, there are various other biases such as loss aversion, falling to a nice story (what most sell-side analysts or marketing pitches do in their reports) which are very nicely written by James Mortimer in his book ” The little book of behavioural investing” which I found it to be fantastic.

  6. Shreenivas Kunte, CFA says:

    Many thanks for reading the post and for referencing the book.

    1. Anil Neerukonda, CFA says:

      The author is James Montier, fund manager at GMO. Thanks.

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