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grown from 20 NYU alumni to more than 200 members in its first three years. The council’s function is to foster a collaborative non-commercial network between NYU faculty and global family offices to enable unique research, tailor-made education, and student mentorship. When asked for a plain English definition


of behavioural finance, D’Souza explains it as the integration of psychology and standard (rational) finance models so that human biases and errors can be incorporated into otherwise spreadsheet-based investment decision-making. This can be practically stated as ‘where Net Present Value meets fear and greed’ or “the difference between Mr Spock or Captain Kirk making an investment decision, using Star Trek parlance”, he jokes. One of the reasons family offices over-


estimate their investment returns can be because of optimism bias and the inter-group effect, D’Souza says. “When a family has derived their wealth


from the sale of a core operating business, they control and make a lot of decisions around micro-variables such as product pricing, supply chain, employee levels, timing of exit etc. It is their own business and the external factors that can affect their business are a subset of that depending on the businesses uniqueness. If they could generate wealth that way, then they may likely project an over-optimism bias for decision-making around non-operating (non-core, non- control) investments [which includes a false illusion of control on many macro-variables]. “There could be another family group who


have made their wealth through running financial businesses where understanding portfolio risk and return is a daily part of their decision-making. They may not suffer over-optimism bias, due to an understanding left-tail risks, but they may suffer from excessive risk management due to loss aversion around inter-group effect and miss right-tail (home run) situations.” But D’Souza cautions against


automatically viewing any single bias as a negative trait. Biases do not exist in isolation and some biases can counteract others. “To have the wealth that created the family office in the first place means the


ISSUE 72 SUPPLEMENT | 2017


We do spend a lot of time thinking about the future outlook from a qualitative point of view, and the trends and directions. To us that is far more important


founders have a very strong set of core skills that may be tilted or skewed where biases were overcome in the wealth accumulation process. When allocating that wealth, the idea should be to recognise if the founders want to continue utilising their skills, in what capacity and when to diversify across assets (and by definition reduce concentration around founder biases).


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