How Your Emotions Get in the Way of Smart Investing
AltX’s Chief Scientist Dr. Thomas Oberlechner responds to Wall Street Journal article: How Your Emotions Get in the Way of Smart Investing
Investors are driven by powerful emotional needs and desires, often without consciously being aware of them
How Your Emotions Get in the Way of Smart Investing by Meir Statman provides excellent insight into how people make investment decisions. Besides their conscious quest for returns, investors are driven by powerful emotional needs and desires, often without consciously being aware of them. Investors are overconfident of their own knowledge and skills. They may enjoy the sheer excitement of gambling too much, at the expense of more important outcomes. They may neglect the future at the expense of irrelevant and short-lived desires, for example, when sacrificing long-term financial security to petty status considerations. Being loss averse, striving to avoid the experience of regret about one’s decisions, and succumbing to hindsight bias may negatively affect the quality of investment decisions — for example, when investors tell themselves that they “knew it all along” when facing outcomes of a decision that in fact were entirely unforeseeable when the decision was taken.
The widespread presence of these dynamics leads to limited and distorted self-perception and self-knowledge among investors. This is relevant not only for inexperienced investors — the judgments of seasoned financial experts may equally be limited by the same behavioral factors. In fact, experience may lead investors to become even more overconfident while the actual quality of their decisions is unchanged. For example, prior to becoming iMatchative’s Chief Science Officer and AltX’s lead Behavioral Scientist; I conducted an extensive academic research study with the world’s foreign exchange trading floors. Even the most senior financial professionals clearly overestimated the precision of their predictions and overrated their performance when comparing themselves to their peers.
Supportive decision making structures and psychologically informed policies (such as cleverly established mental accounts) can help investors deal constructively with the potentially destructive fallacies of human decision-making.
investors identify funds that are comprehensively compatible both to their financial goals and to their unique behavioral characteristics as investment decision-makers
However, it is of critical importance that beyond the narrow goal of wealth maximization, other reasons and values co-determine the investment priorities and decisions of even the most sophisticated institutional investors. As Statman writes, the key is being aware of them — so decisions can be made that are informed by true self-insight and knowledge. The behavioral assessment that I developed for AltX provides just this to current and future hedge funds investors — a systematic and science-based understanding of who they are as an investment decision maker. The resulting profile provides detailed feedback and insight about the kinds of investments decision makers intuitively prefer, the importance of key investment values, actual risk tolerances for different market conditions, key dimensions of their investment personality, their subliminal understanding of markets and investing, and their motivational balance between promoting gains and preventing losses in the investment process. And it allows investors identify funds that are comprehensively compatible both to their financial goals and to their unique behavioral characteristics as investment decision-makers.
Dr. Thomas Oberlechner
Chief Science Officer, AltX
Powered by iMatchative, a financial technology company based in San Francisco, AltX provides a two-sided data analytics, monitoring, and matching platform that enables intelligent alternative investments through superior insights. Cloud-based, automated, and unbiased, AltX harnesses science and technology, financial and behavioral dimensions, proprietary algorithms, sophisticated analytics, relationship mapping, and targeted news to predict compatible investment relationships between funds and investors. The result is simpler and more effective search and discovery, stickier capital, and more productive and satisfying investment partnerships.