Post on 15-Jul-2015
Crowd PsychologyAnalysing group decision-making dynamics to fortify Analysing group decision-making dynamics to fortify
investment strategies and committees
Greg B DaviesHead of Behavioural and Quantitative Investment Philosophy
@GregBDavies
Sell date,
quarterly
7070
75
75
80
80
85
85
90
90
95 00 05 10
If you bought in 1975 and sold in 1995,
your average annual return would have
been 12%
MSCI World Equity Buy date,
95
00
05
10
Equity Annualised Returns
<-5%-5% to
0%
0 to 5%
5 to 10%
10 to 15%
>15%
Buy date,
quarterly
Past performance is not a reliable indicator of future results
Source: MSCI World Index, 1970
- August 2011, Barclays Wealth
7070
75
75
80
80
85
85
90
90
95 00 05 10Sell date,
quarterly
Buy date,
quarterly No nominal losses over any holding period of 12 years
or more
MSCI World Equity
95
00
05
10
Zone of Anxiety
<-5%-5% to
0%
0 to 5%
5 to 10%
10 to 15%
>15%
Equity Annualised Returns
Past performance is not a reliable indicator of future results
Source: MSCI World Index, 1970
- August 2011, Barclays Wealth
Myopic Loss aversion and the Anxiety premium
Probability of loss at different holding periods
25%
30%
35%
40%
45%
In times of stress our emotional
time horizon shortens and
distorts our risk perception
Zone of Anxiety
Source: MSCI World Index, 1970 - August 2011, Barclays Wealth
0%
5%
10%
15%
20%
25% distorts our risk perception
1 2 3 4 5 6Holding period (years)
Past performance is not a reliable indicator of future results
Emotional liquidity: the journey matters!
Which investor is happier at the end?
(Green, black or red)
Port
folio
Retu
rn
Danger of buying high
66
Time
Danger of selling low
Financial Personality Assessment
Traditional Approach Barclays Wealth Approach
HIGH
CO
MP
OS
UR
E
EN
GA
GE
ME
NT
Risk AttitudeHIGH HIGH
PE
RC
EIV
ED
FIN
AN
CIA
L
DE
SIR
E F
OR
DE
LE
GA
TIO
N
HIGH HIGH HIGH
Decision StyleHIGH
TO
LE
RA
NC
E
Risk Tolerance
8
LOWC
OM
PO
SU
RE
MA
RK
ET
EN
GA
GE
ME
NT
LOW LOW LOW
PE
RC
EIV
ED
FIN
AN
CIA
L
EX
PE
RT
ISE
DE
SIR
E F
OR
DE
LE
GA
TIO
N
BE
LIE
F IN
SK
ILL
LOW LOW LOW
RIS
K
TO
LE
RA
NC
E
Personality and the Zone of Anxiety
Me
an
Pe
rso
na
lity
Sc
ore
s
4
Risk Tolerance Composure
I buy and sell investments more than I should
Source: Barclays Wealth Insights Volume 13
Me
an
Pe
rso
na
lity
Sc
ore
s
2
3
Disagree Agree
Becoming a better investor
Pro-cyclical Counter-cyclical
Skill Required Requires clairvoyance,
not skill
Reactive InvestorBuys high, sells low
Constant InvestorRegular
rebalancing
Tactical InvestorTactical rebalancing
The SeerBuys low, sells high
10
Emotional Difficulty
sells low rebalancing sells high
Attempts to time
the market are
dangerous
A countercyclical
tactical approach
is likely to pay off
A little composure
can significantly
increase returns
Most investors
follow this pro-
cyclical pattern
Difficult to avoid
temptation
Teams can outperform individuals…
� Estimating (wisdom of crowds)
� Weather forecasting
� Problem solving
The only function of economic forecasting is to make astrology look respectable
J. K. Galbraith
Estimating the weight of a bull Forecasting financial markets
11
The Cycle of Market Emotions
Exuberance
DenialExcitement
OptimismFear
Irrational exuberance
due to fear of missing out
and herding
12
Reluctance
Panic
Fear
Despondency
Desperation
Capitulation
Reluctance
Depression
Apathy
Indifference
Anxiety premium
Weaknesses of groups and teams
We associate with people more like us
than random: default group of members
tends to not be very diverse
When we learn others opinions we tend
to over-weight their opinions, especially
when they agree with us
1. Homogeneity 2. Contamination
1313
We worry about publicly disagreeing with
others for social or authority reasons, so
tend to agree with leaders opinions
We don’t put effort into finding
information and thinking out our own
opinion when we know others will be
supplying their views
3. Conformity 4. Social Loafing
30%
40%
50%
30%
40%
50%
Bears: Others investors are bearish
…and how differently others see the Market
Bulls: Other investors are bullish
0%
10%
20%
Large
loss
Small
loss
No
change
Small
gain
Large
gain
0%
10%
20%
Large
loss
Small
loss
No
change
Small
gain
Large
gain
Bear’s OpinionSource: Egan, Merkle, Weber, “Naïve Realism and Investment Decisions”, Manuscript, 2011, based on Barclays Wealth 2008-2010 survey of 620 UK-based investors.
Bulls Opinion
On average…
Risk
Tolerance
Composure Market
Engagement
Perceived
Financal
Expertise
Delegation Belief in Skill
Individual variation matters
High
Risk Tolerance
Risk
Tolerance
Risk
Tolerance
Composure
High ComposureComposure
Low Low
Delegation
High DelegationDelegation
Belief in Skill
High Belief in SkillBelief in Skill
Individual variation matters
Low Low
Being greater than the sum of your members
Every trustee will have their own information and facts, but
not necessarily all the relevant factsDiversity
Some trustees focus on specific areas, becoming better or
more efficient at gathering or using informationSpecialisation
22
It’s very important that people's opinions are heard openly
and aren't limited by other group membersIndependence
Mechanism required for turning private judgments into a
collective decision. Some are better than othersConsensus