CFA UK Behavioural Finance Conference 2015

The CFA UK inaugural behavioural finance conference was well attended, unsurprising given the growing interest in behavioural finance and its applications within investment management.

The behavioural bias mentioned by every speaker was overconfidence, with heavy referencing of work by Daniel Kahneman throughout. Arman Eshragi of Edinburgh University included a quote from Kahneman that were he to eliminate one single behavioural bias, it would be overconfidence.

Read More

There were various intriguing examples of overconfidence provided, most interestingly perhaps from Benjamin Kelly at Blackrock who discussed the narrow confidence intervals we all exhibit with wild guesses, never mind experts making predictions or forecasts on their specialist subjects. Arman Eshragi produced academic research suggesting past performance, particularly good performance, boosts active share in the following period, suggesting overconfidence. His research also found solo managers with a 3% higher active share than teams.

Priming and herding were also covered, with Colin McLean, CEO of SVM, providing an interesting example using a fan chart of Bank of England inflation forecasts. It showed that regardless of current inflation, forecast inflation has been persistently centred around 2%. As well as evidence of anchoring, perhaps this also provided evidence of herding (or groupthink). Benjamin Kelly used a very interesting example of the tendency of analysts in morning meetings to make their forecasts or predictions relative to the first forecast provided by the group, resulting in clusters around that first prediction.

Colin McLean quoted Dunning (2014) “Humans process information in a way that not only reflects beliefs, but also reinforces them”, cutting to the core of behavioural finance. As Emily Haisley from Barclays Wealth mentioned, the key to avoiding behavioural biases is by empowering what Daniel Kahneman labelled our analytical, slow System 2, to control for our instinctive, fast System 1, leading to better choices and ultimately better outcomes.

Benjamin Kelly noted this process of correcting for biases involves evaluating our processes rather than our outcomes. The best example is stock-picking. Writing a checklist of why we have bought a stock, and sticking to these principles when deciding subsequent action, can help us make more informed choices. Whether the investment makes or loses money is not as important as whether we conducted the correct analysis. Emily Haisley spoke of the importance of removing reference point dependence and loss aversion (prospect theory). By asking ourselves the question “If I were to invest money today would I buy this stock” it removes the shackles derived from our cost price, and the fear of crystallising losses. Long term, good processes lead to good outcomes.

Perhaps the most interesting trend I have observed from these conferences and talks is from the questions posed by the audience, specifically cultural implications. On each of the last two occasions, the questions have surprised the speaker. This is evidence of the growing interest in cultural relevance in behavioural finance, which we at Camomille see as important.

For further information about Camomille’s research in this area read our research paper Evolutionary Psychology, Neuroscience and Culture here.