Summary

Herman focused his conference call on the behavioural sciences and how they can be widely used to solve problems faced by investment management firms, as well as on his latest briefing: ‘The Psychology of the Sell’.

Human behaviour is often the root of many problems facing professional investors, therefore Prospecta breaks down the way that individuals go about making decisions, how they perceive the information going into these decisions. And, once they have decided, reveals the mental process that unfold when they experience unrealised gains or unrealised losses, Prospecta looks at how this backdrop influences subsequent perceptions, beliefs, judgements, and actions.

Prospecta also investigates the impact of human behaviour within investment management firms more generally, including research into the science of trust between investment managers and institutional clients, which is also the subject of his book, The Trust Mandate.

Herman went on to discuss behavioural ethics. Unethical decisions, he believes, normally come about due to cognitive processes, the presence of certain cues in the environment, and the absence of practical tools to enable people to advocate for an ethical course of action without being systematically disadvantaged. On diversity and inclusion, Prospecta’s behavioural perspective shows how one can improve relationships between team members and people within a firm.

The Psychology of the Sell research shows that investors dedicate a lot of their attention to buying decisions, which outperform a naïve counterfactual to the tune of about 116 basis points in the 12 months after the transaction. However, sell decisions are mostly driven by what the stock has done since they owned it. This inattention costs on average 80 basis points in the first 12 months. The evidence shows that investors would, on average, have done better to randomly sell any other stock in the portfolio than the one that they chose. This shortcoming is not due to the lack of intellectual ability, as the outperformance from buying is highly significant. Instead, the underperformance from sales has to do with the process that managers use to reach that sell decision.