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Greg B Davies, PhD
@GregBDavies
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Investing with Ulysses Better Decisions through Behavioural Design - - PowerPoint PPT Presentation
Investing with Ulysses Better Decisions through Behavioural Design - - PowerPoint PPT Presentation
Investing with Ulysses Better Decisions through Behavioural Design Greg B Davies, PhD @GregBDavies www.oxfordrisk.com | 020 3941 2801 | enquiries@oxfordrisk.com 1 Which investor is happiest at the end? Portfolio Return Time
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<-5%
- 5% to
0% 0 to 5% 5 to 10% 10 to 15% >15%
MSCI World Equity Annualised Returns
Sell date, quarterly Buy date, quarterly
No nominal losses over any holding period of 12 years
- r more
Zone of Anxiety
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4
Exuberance Reluctance Denial Excitement Optimism Panic Fear Despondency Desperation Capitulation Reluctance Depression Apathy Indifference
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Paying too much for emotional comfort
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Destination vs journey
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Destination vs journey
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Alternative X
- Lose $4,000
Alternative Y
- 1/3 chance nothing lost
- 2/3 chance $6,000 lost
67% go for X Alternative A
- Recover $2,000
Alternative B
- 1/3 chance $6,000 recovered
- 2/3 nothing recovered
92% go for A
Would you choose A or B?
Source: Wang, 1996
Imagine you bought $6,000 worth of stock from a now bankrupt company There are two alternatives to recover money…
Would you choose X or Y?
Knowing your own objectives
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Risk Profile Retirement
How risk capacity affects risk profile over time
Static risk tolerance Dynamic risk profile
Early in life: risk capacity justifies increase from RT In retirement: risk capacity implies decrease from RT
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- 60%
- 40%
- 20%
0% 20% 40% 60% 80% Dec-1979 Dec-1984 Dec-1989 Dec-1994 Dec-1999 Dec-2004 Dec-2009 1 Year 10 Year
Framing horizon
MSCI World Index, 1970 – Dec 2013
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The information we do base decisions on
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Decision Constitution
- 1. Decision objectives
- 2. Decision environment
- 3. Circle of competence
- 4. Automated actions
- 5. Contingency plans
Make more decisions ahead of time
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Initiate Plan Deviate Terminate Plan Repeat Reality
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No strategy survives first contact with reality
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Decision readiness: decide when you decide best
Time of Day
Source: Danziger, Levav, Avnaim-Pesso (2011)
Likelihood of Parole
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Know Thyself
Risk Attitudes Decision Style
COMPOSURE BELIEF IN SKILL RISK TOLERANCE MARKET ENGAGEMENT PERCEIVED FINANCIAL EXPERTISE DESIRE FOR DELEGATION
Comfort Learning Panic
Deliberate Practice Psychometrics External Opinions Quantified Self
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Know thyself
Low Composure
- Reduce reporting detail
and frequency
- Portfolio construction to
smooth journey
High Familiarity Bias
- Home biased portfolios or
familiar assets
- Draw attention to specific
assets in reporting
Low Involvement
- Provide lots of decision
support and interaction
- Reduce reporting detail
and frequency
High Impulsivity
- Focus narrative away from
market conditions
- Increase focus on
spending plans and goals
Composure Familiarity Bias Involvement Impulsivity
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The sweet spot for better decisions
Data Digital Behavioural
Grant me: The serenity to accept what computers do better than people, The courage to let people do what they do better than computers, and… The wisdom to know the difference.
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