From appointing a devil's advocate to conducting a 'pre-mortem', Brendan McCurdy runs through four best practices to help investment professionals manage their own behavioural biases
Behavioural finance is a topic du jour for investment professionals but many of us fail to look inward as we apply the discipline's insights. The fact is, however, it is not just individual investors - investment teams and investment committees can be driven by behavioural biases too.
Chief investment officers (CIOs) at private banks and discretionary managers should, in our view, be especially aware of pitfalls hiding within team decision-making processes. To think the topic through, let's turn to a social-science classic - Groupthink by Irving L. Janis - for four best practices in managing our own behavioural biases as investment professionals.
1. Appoint a devil's advocate: Investment teams can often wind up exploring areas of agreement more than areas of disagreement, particularly if team members are concerned about damaging their personal credibility or being viewed as ‘a pain'.
For any team member, it can also be difficult to disagree with a colleague's deeply-held belief. In other words, when one member of the team is vigorously and emotionally defending their view, it can be uncomfortable for others to continue to press the point, even if serious doubts remain.
The CIO can make it one team member's specific assignment to follow every contentious issue. This gives the assigned member personal cover to ensure no serious risks fall through the cracks unexplored. Even better, if a strong personality tends to determine the direction of team conversations, appoint them to the task of vigorously arguing the alternative case.
2. Suspend hierarchy: Junior team members can be encouraged to voice concerns and nagging doubts. Fixed income specialists should be encouraged to challenge the equity team's ideas and vice versa.
While subject matter experts are important for the performance of an investment team, making those experts responsible for the total outcome of the portfolio rather than just each individual's siloed speciality will encourage more of this cross-questioning.
The CIO may even find it useful to leave the room at times if they suspect their presence is inhibiting the free flow of ideas. This can be especially helpful near the beginning of the decision-making process when the goal is to encourage all possible ideas onto the table and any hint at a predetermined outcome is most dangerous.
3. Conduct a ‘pre-mortem': Before the investment team makes any large decision, complete the exercise of imagining the decision is implemented and it is now one year in the future - or six months or five years or whatever the investment time horizon may be - and the investment was a disaster. Why might that be?
This exercise is a countermeasure against overconfidence and forces team-members supportive of the decision to consider alternative outcomes and potential landmines.
4. Bring in outsiders: Effective outsiders might be regular guest speakers at quarterly investment meetings. Or one might choose presentations from specialists in a current area of the team's focus, or the author of a paper with which the team disagrees. All of these will be useful in shaking up the gridlock of groupthink.
Brendan McCurdy is a vice president at Goldman Sachs Asset Management, leading the firm's Europe and Middle East Portfolio Strategy team of Strategic Advisory Solutions
Joining London team
Previously at Old Mutual Wealth
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