The five commonest behavioural investment mistakes – with Joe Wiggins

Joe Wiggins, the author of the excellent Behavioural Investment blog and the latest guest on The Value Perspective podcast, runs through the behavioural issues he comes across the most

24/10/2021

Andrew Evans

Andrew Evans

Fund Manager, Equity Value

Liam Nunn

Liam Nunn

Fund Manager, Equity Value

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At its core, value investing is built on a handful of foundation stones – the price you pay is the biggest driver of future returns, say, or the importance of ‘a margin of safety’ – so it is only natural that, here on The Value Perspective, we often fret about the hazards of repetition. As such, it was reassuring to find Joe Wiggins, the author of one of our favourite blogs, expressing similar concerns on the latest episode of our podcast.

Portfolio manager Wiggins has been writing his Behavioural Investment blog since 2017 and, he assures us, he often worries about repeating the same topics over and over again. “I suppose, in a way, that is what you should be doing,” he adds, however. “Behavioural issues are so important to investment outcomes and need to be reiterated – though perhaps in different ways with different stories to highlight them.

Asked about the most common and potentially damaging behavioural issues he comes across in the context of investment, Wiggins has no trouble assembling a top-five list. “One is time horizons,” he replies immediately. “Investors tend to have incredibly short time horizons – even when they have very long-run objectives – and that dissonance creates a real problem in decision-making.”

Ever-present problem

Next up is ‘outcome bias’ – that is, when you base a decision on the outcome of previous events but without considering how those events played out. “This is particularly pertinent in fund research, given how much performance-chasing there is – and the outcome bias problem of assuming a good result means there is a good process or skill behind it,” says Wiggins. “That is an ever-present problem in fund manager research.

Overconfidence – thinking we are better than we are and so taking decisions where the odds are not in our favour – is another incredibly common one while ‘action bias’ is just being too frequent in our activities and trading too much. There is real stigma in the investment industry around doing nothing – even when it is the most sensible decision we could be making.”

His last point, Wiggins notes, is actually a conflation of two different behavioural finance sins – recency bias and extrapolation. “We tend to think what has happened in our recent past will persist into our future,” he says. “As such, we make many of our decisions based on what has been working in recent years, rather than consider the full body of evidence and the fact things change based on a range of different factors.”

Behaviour sits at the heart of investment, Wiggins maintains, adding: “I often receive scornful looks when I say I studied sociology as an undergrad – it is not the typical path to a career in investment. Fundamentally, though, everything we do is about behaviour – of markets, of fund managers and of ourselves. It – not analytics, not information – is the most important element of what we do yet it is a hugely untapped area.”

Author

Andrew Evans

Andrew Evans

Fund Manager, Equity Value

I joined Schroders in 2015 as a member of the Value Investment team and manage the European Value and European Yield funds. Prior to joining Schroders, I was responsible for the UK research process at Threadneedle. I began my investment career in 2001 at Dresdner Kleinwort as a Pan-European transport analyst and hold a Economics degree.

Liam Nunn

Liam Nunn

Fund Manager, Equity Value

I commenced my investment career in 2011 at Schroders as a European equity analyst. I then moved to Merian Global Investors in 2015 to work as an equity analyst & fund manager before returning to Schroders to join the Global Value team in January 2019. I manage Global Income, Global Recovery and Global Sustainable Value.

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