25 years: Investment management
Earlier in this pathway, we examined the set of tools used to deconstruct the investment skills into decisions that we can analyse to obtain objective insight into how well they are carried out. In this video, Ali covers a few behavioural biases that can hinder the ability of the portfolio manager to make the right decisions to generate positive performance.
Earlier in this pathway, we examined the set of tools used to deconstruct the investment skills into decisions that we can analyse to obtain objective insight into how well they are carried out. In this video, Ali covers a few behavioural biases that can hinder the ability of the portfolio manager to make the right decisions to generate positive performance.
Subscribe to watch
Access this and all of the content on our platform by signing up for a 14-day free trial.
8 mins 30 secs
In this video we covered a few behavioural biases that can hinder the ability of the portfolio manager to make the right decisions to generate positive performance. Other biases can cloud the decision to adjust existing positions. Disposition effect and Loss Aversion are examples of these biases where the legacy of past performance systematically influences the portfolio managers ability to make decisions for future performance.
Key learning objectives:
What is Narrative fallacy?
What is Loss aversion and the Disposition effect?
What is Escalation of commitment?
Access this and all of the content on our platform by signing up for a 14-day free trial.
We naturally love stories and we sometimes let our preference for a good story cloud the facts and our ability to objectively assess a situation. The narrative fallacy leads us to see events as stories, with logical chains of cause and effect that are different from the real ones.
For investment professionals we expect them to have performed in the past. But, more importantly, to have a clear discipline to repeat this success in the future. Misunderstanding what happened in the past can prevent the portfolio manager from focusing on what really matters or can lead him to make the wrong decision.
Having a set of objective metrics and contrasting them to the portfolio manager narrative. A conscious effort should be made to isolate what can be attributed to luck and what is linked to skill or judgement. For all these reasons, conducting an investment skill analysis and comparing the objective metrics against the portfolio manager’s gut feelings should be a good starting point to mitigate the effect of Narrative Fallacy.
For example having a momentum bias with some herding bias may be acceptable when we manage a growth oriented portfolio. However, biases can be detrimental if you are not aware of them and do not take action to keep them in check but they clearly come with upsides as well—they can improve decision-making efficiency.
Access this and all of the content on our platform by signing up for a 14-day free trial.
There are no available videos from "Ali Chabaane"