1. Dynamic Planner Annual Conference
Paul Craven, Behavioural Economist

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

3. A Question Which is the odd one out? 1. 2. 3. 4. 5.
Source: Tanya Khovanova, 2009
There is no such thing as a free lunch, but diversification comes close
Behavioural biases are present in most client portfolios, and they impact portfolio returns negatively.
A structured investment process supports clients tackle their behavioural biases.
Risk profiling, Strategic Asset Allocation (SAA), Tactical Asset Allocation (TAA), and automatic portfolio rebalancing help to optimize portfolio performance.

4. Your mind plays tricks! The Disappearing Yellow Dots
Source: Yoram Bonneh
The Smith-Kettlewell Eye Research Institute (2001)
There is no such thing as a free lunch, but diversification comes close
Behavioural biases are present in most client portfolios, and they impact portfolio returns negatively.
A structured investment process supports clients tackle their behavioural biases.
Risk profiling, Strategic Asset Allocation (SAA), Tactical Asset Allocation (TAA), and automatic portfolio rebalancing help to optimize portfolio performance.

5. Why were none of the 62 recessions in 2008-09 predicted in the previous year?
Unreliable economic models?
Incentivisation?
Behavioural biases?
There is no such thing as a free lunch, but diversification comes close
Behavioural biases are present in most client portfolios, and they impact portfolio returns negatively.
A structured investment process supports clients tackle their behavioural biases.
Risk profiling, Strategic Asset Allocation (SAA), Tactical Asset Allocation (TAA), and automatic portfolio rebalancing help to optimize portfolio performance.
Source: Ahir and Loungani, “Fail Again? Fail Better? Forecasts by Economists During the Great Recession” (2014), Consensus Forecasts

6. Today’s Session The Mind Biases Enhancing Skills
We all make mental short-cuts
Being aware of our own biases makes them much less dangerous
The Mind
Biases
Enhancing Skills
There is no such thing as a free lunch, but diversification comes close
Behavioural biases are present in most client portfolios, and they impact portfolio returns negatively.
A structured investment process supports clients tackle their behavioural biases.
Risk profiling, Strategic Asset Allocation (SAA), Tactical Asset Allocation (TAA), and automatic portfolio rebalancing help to optimize portfolio performance.

7. Dual process model of the brain
System 1 fast, unconscious, reactive, emotional
System 2 slow, conscious, analytical, rational
There is no such thing as a free lunch, but diversification comes close
Behavioural biases are present in most client portfolios, and they impact portfolio returns negatively.
A structured investment process supports clients tackle their behavioural biases.
Risk profiling, Strategic Asset Allocation (SAA), Tactical Asset Allocation (TAA), and automatic portfolio rebalancing help to optimize portfolio performance.

8. Human rationality System 1 v System 2?
There is no such thing as a free lunch, but diversification comes close
Behavioural biases are present in most client portfolios, and they impact portfolio returns negatively.
A structured investment process supports clients tackle their behavioural biases.
Risk profiling, Strategic Asset Allocation (SAA), Tactical Asset Allocation (TAA), and automatic portfolio rebalancing help to optimize portfolio performance.
Source:

9. Biases Evolutionarily successful: 150+ modern day biases
Probability & belief
Decision-
making
Social
Evolutionarily successful: modern day biases
You / Colleagues / Clients
What biases are you likely to encounter in your investment?
Memory
There is no such thing as a free lunch, but diversification comes close
Behavioural biases are present in most client portfolios, and they impact portfolio returns negatively.
A structured investment process supports clients tackle their behavioural biases.
Risk profiling, Strategic Asset Allocation (SAA), Tactical Asset Allocation (TAA), and automatic portfolio rebalancing help to optimize portfolio performance.

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

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

12. “We must not do the wrong things for the right reason…”
2. Confirmation Bias
Politics
Question Time October 15th, 2015
“We must not do the wrong things for the right reason…”
Ron Liddle
There is no such thing as a free lunch, but diversification comes close
Behavioural biases are present in most client portfolios, and they impact portfolio returns negatively.
A structured investment process supports clients tackle their behavioural biases.
Risk profiling, Strategic Asset Allocation (SAA), Tactical Asset Allocation (TAA), and automatic portfolio rebalancing help to optimize portfolio performance.

13. “Still a man hears what he wants to hear and disregards the rest”
2. Confirmation Bias
Politics, Business and Investment
The Sunk Cost Fallacy
“Still a man hears what he wants to hear and disregards the rest”
Paul Simon 1. 2. 3. 4. 5.
There is no such thing as a free lunch, but diversification comes close
Behavioural biases are present in most client portfolios, and they impact portfolio returns negatively.
A structured investment process supports clients tackle their behavioural biases.
Risk profiling, Strategic Asset Allocation (SAA), Tactical Asset Allocation (TAA), and automatic portfolio rebalancing help to optimize portfolio performance.
Source:

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 ( ), producing 10 children
Source: The Correspondence of Charles Darwin, Volume 2:

16. 3. Hindsight Bias We are all experts with hindsight
Creeping determinism
There is no such thing as a free lunch, but diversification comes close
Behavioural biases are present in most client portfolios, and they impact portfolio returns negatively.
A structured investment process supports clients tackle their behavioural biases.
Risk profiling, Strategic Asset Allocation (SAA), Tactical Asset Allocation (TAA), and automatic portfolio rebalancing help to optimize portfolio performance.
Further Reading: Superforecasting by Philip Tetlock. (2015)

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

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
What type of industries use checklists?

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

20. Summary We all make mental short-cuts
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
There is no such thing as a free lunch, but diversification comes close
Behavioural biases are present in most client portfolios, and they impact portfolio returns negatively.
A structured investment process supports clients tackle their behavioural biases.
Risk profiling, Strategic Asset Allocation (SAA), Tactical Asset Allocation (TAA), and automatic portfolio rebalancing help to optimize portfolio performance.

21. Please stay in touch: paul@paulcraven.com
Thank you very much!
There is no such thing as a free lunch, but diversification comes close
Behavioural biases are present in most client portfolios, and they impact portfolio returns negatively.
A structured investment process supports clients tackle their behavioural biases.
Risk profiling, Strategic Asset Allocation (SAA), Tactical Asset Allocation (TAA), and automatic portfolio rebalancing help to optimize portfolio performance.
Please stay in touch:

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