I recently attended the Behavioral Finance Symposium at Golden Gate University in San Francisco. The speakers were academics and practitioners speaking on the behavioral challenges to good investment and trading decisions. The crowd seemed to be mostly left-coast traders, investment managers and consultants. Many of the talks were thought provoking and left me with a number of take-aways for my app-development and lecturing. Here’s a summary of most of the talks:
Stephen Duneier, in Better Decisions, Better Results, discussed how marginal improvements in decision processes, when accumulated over many decisions, can lead to enormous gains in performance. For example, maintaining control over the soccer ball over many games can increase the chances of winning a championship. In a dramatic metaphor, he suggests that many of us over-rely on heuristics, this makes us subject to outside influences and a mere “spectator” to our decisions. As evidence, he displayed a famous graphic showing how merely making organ donation (figure 2 here) the default choice can lead to enormous changes in individuals’ decisions.
Are we merely “spectators” to our decisions?
How to avoid being a spectator? He suggests we need to “outsource” our decision-making to…ourselves. In essence, he recommends a commitment device that “straight-jacket’s” our future decision-making to a decision tree. He also recommends ignoring the popular news since “the brain can’t distinguish between relevant and irrelevant data.”
In an entertainingly discouraging talk, Confronting the Growing Impact of Public Misinformation, journalist David Freedman claims that, we don’t give good advice and we don’t take good advice when it’s offered. We are persuaded by stories that have a “high narrative appeal,” prefer to explain our failures based on an “evil agent” or an “internal glitch,” and will only consider a solution that appears to be a “simple fix.”
He notes that academia actually has little incentive to publish the truth. They must publish to survive and they can only publish things that are surprising. Unfortunately, surprising results are usually incorrect. He claims the peer review process is unreliable and the press similarly has little incentive to get stories right. For them, narrative appeal is more important. To find the truth, we the readers have to look for consensus.
If we’re offering advice, we have to recognize that we’re competing for attention. We must package our advice in a simple and catchy snippet, and make a claim that sounds surprising (while still being honest). Finally, we need to align our message with the audience’s values and beliefs.
Daniel Crosby, in What Freud Can Teach Warren Buffet, shared research that individual investors with advisers tend to outperform self-directed investors. This is not because they’re picking better managers or investments. Rather, advisers help manage behaviors. For example, they may help prevent investors from panic-selling at market bottoms. (Another study by Fidelity indicated that the best performing accounts were those that the people had forgotten about!) Crosby appears to agree with Duneier that our environment drives our decisions, which makes free will “problematic.” Outside influences can make us over-confident, over-conservative or attend to more salient, but less relevant information. So, we should acknowledge our flaws, hold reasonable convictions and “have the courage to do what’s best, but which feels worst.” Further, he says, “Human discretion is subtractive.” Simple rules (algorithms) are better.
Overall, this symposium left me with the feeling that our understanding of human behavior and decision-making is still limited and developing. One thought that occurred to me on the way home was about the debate between the Thaler/Kahneman and Sunstein camp with their pessimistic view of poor human decision-making vs. the Gigerenzer camp which is rather more hopeful and optimistic about the value of intuition. The former seems to be winning the debate, with a best-selling book and lots of press. Is this because they offer quick fixes (nudges) and salient, simple headlines versus Gigerenzer’s more nuanced and complex viewpoint (often in German)?
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