25 years: Investment management
Behavioural analysis is a fundamental component to continuous improvement of the investment process for an investment manager. In this video, Ali explains us the skills required in managing an investment portfolio. He further highlights how an investment decision is made and analysed and speaks about the two main approaches used to explore the behaviour of a portfolio manager when they have to make investment decisions.
Behavioural analysis is a fundamental component to continuous improvement of the investment process for an investment manager. In this video, Ali explains us the skills required in managing an investment portfolio. He further highlights how an investment decision is made and analysed and speaks about the two main approaches used to explore the behaviour of a portfolio manager when they have to make investment decisions.
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11 mins 5 secs
Behavioural analysis is a fundamental component to continuous improvement of the investment process for an investment manager, and therefore ultimately the returns on investment.
Key learning objectives:
Who uses Investment Behavioural Analysis?
What are portfolio managers expected to do?
What are the two main approaches used to explore the behaviour of a portfolio manager?
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It usually starts from a richer set of data on what the portfolio manager has effectively traded. These trades are used to build a complete database of the implemented investment strategies and the decisions behind them. It then uses on one side the advances in the science of decision-making and behavioural analysis and on the other side the progress in data science and processing power of large data sets. The output is a suite of objective metrics providing insights on the skill used to achieve the performance, which also provide enough confidence in the ability to repeat a success.
In using the first approach we will ask the portfolio manager to fill in a psychometric questionnaire. The objective of the questions asked is to reveal personality traits which will suggest how the portfolio manager may behave when they make investment decisions. They are also designed to try to reveal any cognitive and behavioural biases that may hinder the quality of the investment decisions being made.
The second approach for exploring these behavioural patterns starts from the premise that a portfolio manager has already faced different investment situations and contexts in the past. They have already provided answers to these situations through what strategies have been implemented and what has been effectively traded.
What we need to do is to get a history of these trades, infer the relevant investment decisions, link them to the context in which they have been made and record their performance outcomes. The result is a ledger of investment decisions.
We can then use tools driven from data science and all the advances in processing power to explore this ledger to find out how successful the decisions were, to identify if there are any behavioural biases hindering the portfolio manager and finally, to link those insights to the desired portfolio performance outcome.
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