What behavioural biases are driving your investment decisions?
11 Aug, 2023

Adam Bulkin, Head of Global Portfolios at Sanlam Investments Multi-Manager

 

What drives your investment decisions? Understanding financial psychology and our innate behavioural biases will help you unpack what drives you; and will empower you to make the best, most rational investment decisions. It will also help you identify opportunities and mitigate risk. Here, Adam Bulkin, Head of Global Portfolios at Sanlam Investments Multi-Manager, shares some of the most common behavioural biases that are likely to influence your everyday money decisions.

 

1. Herding: This is an investor’s tendency to follow and copy what other investors are doing, rather than making independent decisions based on their own analysis and information. This can lead to the formation of market bubbles or crashes, as the herd mentality can cause prices to rise or fall rapidly and unpredictably. Herding behaviour is often driven by emotions such as fear, greed, or panic, and can be exacerbated by the availability of real-time information and social media, which can amplify the actions of the herd.

 

2. Confirmation bias: This is the tendency to seek out or favour information that supports one’s preconceived notions and to disregard or ignore data that presents contradictory ideas. This bias may lead investors to focus only on information that reinforces their opinions about an investment. This results in a one-sided view and a self-reinforcing loop.

 

3. Recency bias: This bias is the tendency of an investor to consider only the most recent price movements, news or information and ignore or fail to account for what happened in the past. This bias may lead investors to think that a current equity market downturn or rally will extend into the future.

 

4. Regret avoidance: You choose to do something to avoid potential regret later. For example, investors may buy a share because they don’t want to regret missing out on the opportunity. Conversely, investors may hang on to poor investments too long or continue adding money in the hope that the situation will turn around and losses can be recovered, thus avoiding feelings of regret.

 

5. Narrative fallacy: This is the tendency to make an investment based on a good story, without necessarily considering the fundamental, often complex, nature of the investment. This allows people to make investment decisions they may think are perfectly rational and objective, but in fact may have a fictitious or invalid base.

 

Behavioural finance in the investment context

 

Bulkin says the dot-com bubble was a real-life example of behaviours such as herding, confirmation bias, regret avoidance and recency bias which, combined, led to poor investment decisions. He adds that Bitcoin valuation may be similarly driven by speculation, with investors heavily influenced by varying biases, influenced heavily by the biases described above.

 

Artificial intelligence and behavioural finance

 

Bulkin suggests that the soaring, then plummeting, then soaring again prices of seven stocks – Apple, Microsoft, Nvidia, Amazon, Meta, Tesla and Alphabet – may also demonstrate a strong aspect of bias. “While it is possible that these valuations are fully justified and the disparity between these counters and the rest of the companies listed on the S&P 500 correctly reflects their divergent future prospects, it is probable that at present there is an element of hype, narrative fallacy and other behavioural biases influencing the market.”

 

Lessening the behavioural biases impact

 

To lessen the impact of innate biases, Bulkin suggests partnering with an investment management house that specialises in having multiple fund managers managing a diverse portfolio of funds, with a wide range of styles and approaches. This fosters diversity of opinion, which helps smooth out biases from decision-making.

 

He says it’s also important to choose an asset manager that has a clearly defined philosophy and process, in order to make allocation and manager selection decisions in a disciplined way, that isn’t influenced by the most recent performance of such asset classes or managers.

 

“Sanlam Investments Multi-Manager’s diverse investment team makes decisions as a collective, and we actively encourage debate and the expression of different views. This reduces the risk of herd mentality and lessens the impact of behavioural biases to foster better investment decisions.”

 

ENDS

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@Adam Bulkin
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