To paraphrase from an excellent book, The Chimp Paradox; ‘to control your inner chimp, you first have to understand him/her’. This means understanding that your brain makes decisions that are not always in your best interest and the best way to do this set rules around certain behaviours to minimize your inner chimp controlling you. You can’t ever rid yourself of your inner chimp.
An example of this is setting buy/sell rules in advance (loss aversion and diminished sensitivity to gains and losses), knowing that you are likely to be scared/ euphoric if the price fall/rises and your chimp will be running on adrenalin controlling you.
A second example could be to understand your “nearness bias” – whereby you tend to rely more heavily on data or anecdotes you can recall. Write an alternate thesis down and test that.
Our firm is, and always has been, a heavy user of the principles of behavioural economics. I attended a university that focused on heterodox economics, rather than the model of the perfectly rational human taught at “neoclassical economics” or Chicago schools, that Behavioural economics repudiated to some degree. As a result, I built a process to incorporate these principles, so part of me is gratified (vindicated?) seeing first Kahneman & Tversky and now Thaler recognized for their contributions.
Two principals in action
The most obvious implementation is that of stop-loss rules across the firm. This is to stop loss aversion turning into “gamblers ruin”.
A lesser obvious one is “do you really need more information?” Studies have shown that confidence levels rise the more work that is done on a stock, as supporting evidence is found, but success levels plateau and then fall. Perversely, some level of uncertainty about not knowing the answer actually makes the analyst better!
An example of ‘anchoring’
In a world trading at all-time highs on many stock markets and lofty P/E multiples, this one is much harder than a few years ago! So, this answer is a little abstract – I think the biggest anchoring to old information that’s taken place, and which is having the largest effect: Central Banks are using mental models of inflation that are 20 years old and don’t work - and haven’t worked for many years!
These central bankers nearly uniformly attended the aforementioned “neoclassical schools” (Yellen’s thesis was "Employment, Output and Capital Accumulation in an Open Economy: A Disequilibrium Approach"…) where credit doesn’t matter in their inflation models. In their quest to target something that is largely beyond their control – US or Australian CPI is driven by automation and globalization – to fight the memories of inflation from their youth, they have created one of the largest credit bubbles the world has ever seen.
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