1. Ensuring Investment Suitability ©2016 Distribution Technology Ltd. All Rights Reserved. Paul Craven, Behavioural Economist Dynamic Planner Annual Conference

2. Ensuring Investment Suitability: A Behavioural Perspective Paul Craven Distribution Technology 2016 The Brewery, Chiswell Street, London March 2 nd, 2016

3. A Question Source: Tanya Khovanova, 2009 Which is the odd one out? 1.2.3.4.5.

4. Your mind plays tricks! The Disappearing Yellow Dots Source: Yoram Bonneh The Smith-Kettlewell Eye Research Institute (2001)

5.  Unreliable economic models?  Incentivisation?  Behavioural biases? Why were none of the 62 recessions in 2008-09 predicted in the previous year? Source: Ahir and Loungani, “Fail Again? Fail Better? Forecasts by Economists During the Great Recession” (2014), Consensus Forecasts

6. Today’s Session 1.The Mind 2.Biases 3.Enhancing Skills We all make mental short-cuts

7. Dual process model of the brain System 1 fast, unconscious, reactive, emotional System 2 slow, conscious, analytical, rational

8. Human rationality System 1 v System 2? Source: www.paulcraven.com

9. Biases  Evolutionarily successful: 150+ modern day biases  You / Colleagues / Clients  What biases are you likely to encounter in your investment? Probability & belief Decision-making Social Memory

10. 1. The Herd Instinct Recent Bubbles (Jan 1998 = 100)(Jan 2003 = 100)(Jan 2006 = 100) “History does not repeat itself, but it does rhyme” Mark Twain Source: Dr Jean-Paul Rodrigue, Hofstra University

11. Investment markets Humans are emotional! Source: Westcore Funds / Denver Investment Advisors, 1998 Point of maximum financial risk Point of maximum financial opportunity

12. 2. Confirmation Bias “We must not do the wrong things for the right reason…” Ron Liddle  Politics  Question Time October 15th, 2015

13. 2. Confirmation Bias “Still a man hears what he wants to hear and disregards the rest” Paul Simon  Politics, Business and Investment  The Sunk Cost Fallacy 1.2.3.4.5. Source: www.avioners.net

14. Blank Sheet of Paper Approach “How many of us genuinely do this in our individual or group decision making?” “Most of our mistakes come from using System 1 when we are in fact thinking we are using System 2.” Nassim Taleb

15. Charles Darwin’s Pros and Cons of Marriage Charles Darwin and Emma Wedgwood. had a long and happy marriage (1839-1882), producing 10 children Source: The Correspondence of Charles Darwin, Volume 2: 1837-1843

16. 3. Hindsight Bias  We are all experts with hindsight  Creeping determinism Further Reading: Superforecasting by Philip Tetlock. (2015)

17. Source: Michael Mauboussin, CSFB. The Luck vs. Skill Continuum Where does the investment industry sit? From Roulette to Chess: the luck/skill continuum PURE LUCK PURE SKILL Further reading: The Success Equation by Michael Mauboussin

18. Decision Making ‘Process’  “How systematic are you and your clients?” e.g. Checklists make for smarter, more systematic decision-makers The importance of Dynamic Planner

19. A Behavioural Perspective: Benefits Self awareness and self discipline… …leading to more effective decision- making Self-awareness as individuals and in groups …leading to enhanced business relationships …and improved understanding and communication….should result in better investment decisions. A more systematic decision making process…

20. Summary Our psychology determines our behaviour:  We all make mental short-cuts  Understanding human psychology gives us a major advantage “If you don’t know who you are, the stock market is an expensive place to find out…” Adam Smith

21. Thank you very much! Please stay in touch: paul@paulcraven.com www.paulcraven.com

22. Brisbane Source: www.paulcraven.com Testing The Wisdom of Crowds Is there the next Warren Buffett in the room?