Human decision making – fundamentally flawed.
Author: Ash Weston, 8AM Global
We believe the most rational thing a professional investor (or any investor for that matter) can do is accept that they’re not.
Any underlying biases and subsequent actions taken are intrinsically linked with a personal style. The contrarian manager sees potential value at every turn, and their team undertakes research in that context. Thus, they confirm that there is value everywhere! Ironically, without a robust, emotionless research process, the probability of bad outcomes is often neglected by viewing potential outcome scenarios as ‘black or white’. Reality is never so kind as to provide binary clarity, except in hindsight. (Please see Occam’s Razor for full detail!)
Personal narrative is as key in investment management as it is in life. How could a star fund manager not want that stardom to continue? Try and make a balanced decision when you believe that everything you touch turns to gold…
Best-in-class asset allocation policy, a framework that sees us targeting neutrality (relative to a crowd-sourced outperforming peer group sample) over the longer term. With shorter-term active positioning achieved via systematic sector screening, fund selection and evidence-based allocation and factor tilts. Giving us almost complete mitigation of bias and a human decision-making reduced to straightforward yes/no questions that are simple to explain to clients.
Traditional Tactical asset allocation relies on making two extraordinarily difficult calls:
- Predicting a future event.
- Predicting exactly how markets will react to that event.
So, equity managers who might have been ‘gifted’ enough to predict the pandemic might well have gone to cash early in Q1 2020. Unless they reversed that decision sharply following the initial sell- off, they would have been left significantly behind those who essentially did nothing, as a raft of fiscal and political measures swept through markets and left thematic global equities to roar ahead of cash for the remainder of the year.
You don’t just have to make those fortuitous calls once, but many times – whilst determining the scaling in, out and the final exit of the position.
Human-directed TAA struggles to adapt to dynamic market conditions, and if we know anything by now, it’s that markets are dynamic (and fickle).
Trials and tribulations associated with actually predicting an event or calling a turning point and then predicting the market reaction aside, it’s challenging to move with sufficient pace to capitalise.
Generally (but not exclusively), the larger the portfolio, the institution, or both, the harder it is to position quickly, although this isn’t an issue for ‘Big Investment’ businesses only. Decision-making takes time, especially if consensus is required. Throw in any dealing and liquidity constraints, and the element of proportionate response-time is lost.
8AM AQ methodology is responsive, easily deployable, built to adapt to dynamic markets and to do so without bias, superstition, or sentimentality. We believe that human tactical calls will always produce inconsistent performance. There are clear ways to mitigate it without simply accepting you live and die by the index, and we have worked hard to imbue that into our methodology.
Contact us to find out how we are different.
This content is intended for financial professionals only. These are the author’s views at the time of writing and may be subject to change. This content is not intended to provide the basis for any investment advice or recommendation. Any forecasts, figures, opinions, tools, strategies, data, or investment techniques are included for information purposes only.
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