Investor psychology – Feature


or rumours that don’t have investment value,” he says. The overconfidence effect may well be intensified in the mar- ket by the demographic make-up of its participants, with evi- dence showing a greater propensity to overconfidence among men than women, and that single men trade more aggressive- ly than women or married men. But differences between male and female investment behav- iour should not be overstated, Antoniou stresses. “The male/female difference is the main distinction among people but it is a weak distinction; the variation of these biases in the population is not that big,” Antoniou notes. Yet that such differences exist between men and women could be seen as complementary, particularly in a group, or institu- tional investment context. Professor Nigel Nicholson of London Business School believes that an asset management industry more equally balanced between men and women could make for more fruitful discus- sions and active processes before decisions are made.


Bias cut People invest money to make more money and yet their avarice can be counter-productive to their aims. Consider another common bias, a difference in attitude to investments in which people have made money compared to those which have made losses. But the difference in attitude is the opposite to what would be expected. Researchers have found that there is an asymmetry in how people behave when they make losses compared with when they make gains and that people displaying a strange attach- ment to their loss-making stocks.


“What tends to happen is that people are quicker to sell their winning stocks and less willing to sell the losing stocks with assymetries in how people perceive gains from losses,” Antoni- ou says, adding: “This can be costly for investors as they are reluctant to write off their losses so that they could reduce their tax bill.” Another common bias shows the importance of memory in the human psyche with personal experiences influencing the way investors think about assets. Antoniou explains: “So let’s say you start participating in the stock market in a period the stock market is doing better, then I will be more open to investing in equities, compared to some- one that just happened to be engaged in equities at a period when the market wasn’t doing so well.” The bias is at odds with the most basic of investment mantras, that past performance is no guide to future performance. For all its repetition, the mantra’s effects may be all but negated by the mental forcefield of positive or negative memories. Professor Nigel Nicholson, business psychologist at London Business School, is in no doubt that biases engrained in the


People think trends will continue, excessively buying things that have risen in the past and excessively selling things that have fallen in the past. This exaggerates trends and can lead to dysfunction in the market. Professor David de Meza, London School of Economics


mind are stronger than the brain’s ability to reason. “Loss aversion is important - as Jimmy Connors once said peo- ple hate to lose more than they love to win - this leads people often to sell too early and to chase losses,” Nicholson says. Loss aversion, that inability to relinquish possession of an asset no matter how its value seems to be draining away and unlikely it is to produce returns seems to be a trait so hard- wired in the human brain that it can derail another trait that humans have to varying degrees but must be a key item in the investment armoury, the ability to take risks. “On the trading floor you have to train traders how to lose money because otherwise they start making bad decisions and won’t take the right risks. That’s one of the most important biases,” Nicholson says. As if all that weren’t enough, humans are also hampered in their investment decision-making by superficiality in their analysis. This tendency not to look far beneath the surface is more expensive for investors than they realise. Constantinos Antoniou calls this a shrouded attribute. “Another bias that I would say is costly is people are not very


Issue 91 | March 2020 | portfolio institutional | 25


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