Crowd PsychologyAnalysing group decision-making dynamics to fortify             investment strategies and committees      ...
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70             75            80             85          90         95            00            05    10Sell date,         ...
70             75            80             85          90         95            00            05    10Sell date,         ...
Myopic Loss aversion and the Anxiety premium                           Probability of loss at different holding periods   ...
Emotional liquidity: the journey matters!                   Which investor is happier at the end?                         ...
Financial Personality Assessment         Traditional Approach               Barclays Wealth Approach           Risk Tolera...
Personality and the Zone of Anxiety                                      Risk Tolerance      Composure  Mean Personality S...
Becoming a better investor      Pro-cyclical                                                        Counter-cyclical      ...
Teams can outperform individuals…       Estimating (wisdom of crowds)      The only function of economic forecasting      ...
The Cycle of Market Emotions                                                 Irrational exuberance                        ...
Weaknesses of groups and teams                 1. Homogeneity                              2. Contamination      We associ...
We underestimate how differently others see the world14
…and how differently others see the Market  Bears: Others investors are bearish                                           ...
Weakness: Conformity16
On average…     Risk      Composure     M arket    Perceived   Delegation   Belief in Skill   Tolerance               Enga...
Individual variation matters         Risk Tolerance                   Composure  High     Risk        Risk      High   Com...
Composure and Risk Tolerance High  Composure Low              Low                     High                     Risk Tolera...
Individual variation matters            Delegation                          Belief in Skill  High   Delegation      Delega...
Being greater than the sum of your members      Diversity        Every trustee will have their own information and facts, ...
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Crowd Psychology: Analysing group decision-making dynamics to fortify investment strategies and committees Presentation by...
Crowd Psychology: Analysing group decision-making dynamics to fortify investment strategies and committees Presentation by...
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Crowd Psychology: Analysing group decision-making dynamics to fortify investment strategies and committees Presentation by: Greg B Davies, Barclays Wealth - Elite Summit

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For more information contact: emailus@marcusevans.com

Greg B Davies, Head of Behavioural and Quantitative Investment Philosophy from Barclays Wealth delivered his presentation titled "Crowd Psychology: Analysing group decision-making dynamics to fortify investment strategies and committees" at the marcus evans Elite Summit 2011.

Join the November 2014 Summit along with leading European family offices and global asset managers in an intimate environment for a focused discussion of key new drivers shaping wealth management strategies today.

For more information contact: emailus@marcusevans.com

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Crowd Psychology: Analysing group decision-making dynamics to fortify investment strategies and committees Presentation by: Greg B Davies, Barclays Wealth - Elite Summit

  1. 1. Crowd PsychologyAnalysing group decision-making dynamics to fortify investment strategies and committees Greg B Davies Head of Behavioural and Quantitative Investment Philosophy @GregBDavies
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  3. 3. 70 75 80 85 90 95 00 05 10Sell date, 70quarterly If you bought in 1975 75 and sold in 1995, your average annual 80 return would have been 12% 85 MSCI World 90 Buy date, Equity quarterly Annualised 95 Returns 00 Past performance is not a reliable indicator of future results 05 -5% to 0 to 5 to 10 to <-5% >15% Source: MSCI World Index, 1970 0% 5% 10% 15% - August 2011, Barclays Wealth 10
  4. 4. 70 75 80 85 90 95 00 05 10Sell date, 70quarterly Buy date, 75 quarterly No nominal losses 80 over any holding period of 12 years 85 or more MSCI World 90 Equity Annualised Zone of 95 Returns Anxiety 00 Past performance is not a reliable indicator of future results 05 -5% to 0 to 5 to 10 to <-5% >15% Source: MSCI World Index, 1970 0% 5% 10% 15% - August 2011, Barclays Wealth 10
  5. 5. Myopic Loss aversion and the Anxiety premium Probability of loss at different holding periods 45% 40% Zone of Anxiety 35% In times of stress our emotional 30% time horizon shortens and 25% distorts our risk perception 20% 15% 10% 5% 0% 1 2 3 4 5 6 Holding period (years) Past performance is not a reliable indicator of future results Source: MSCI World Index, 1970 - August 2011, Barclays Wealth
  6. 6. Emotional liquidity: the journey matters! Which investor is happier at the end? (Green, black or red) Portfolio Return Danger of buying high Danger of selling low Time6
  7. 7. Financial Personality Assessment Traditional Approach Barclays Wealth Approach Risk Tolerance Risk Attitude Decision Style HIGH HIGH HIGH HIGH HIGH HIGH HIGH PERCEIVED FINANCIAL ENGAGEMENT COMPOSURE DELEGATION TOLERANCE DESIRE FOR EXPERTISE BELIEF IN MARKET SKILL RISK LOW LOW LOW LOW LOW LOW LOW8
  8. 8. Personality and the Zone of Anxiety Risk Tolerance Composure Mean Personality Scores 4 3 2 Disagree Agree I buy and sell investments more than I shouldSource: Barclays Wealth Insights Volume 13
  9. 9. Becoming a better investor Pro-cyclical Counter-cyclical Skill Required Requires clairvoyance, not skill Reactive Investor Constant Investor Tactical Investor The Seer Buys high, Regular Tactical rebalancing Buys low, sells low rebalancing sells high Difficult to avoid Emotional Difficulty temptation Most investors A little composure A countercyclical Attempts to time follow this pro- can significantly tactical approach the market are cyclical pattern increase returns is likely to pay off dangerous10
  10. 10. Teams can outperform individuals… Estimating (wisdom of crowds) The only function of economic forecasting Weather forecasting is to make astrology look respectable Problem solving J. K. Galbraith Estimating the weight of a bull Forecasting financial markets11
  11. 11. The Cycle of Market Emotions Irrational exuberance due to fear of missing out Exuberance and herding Excitement Denial Optimism Fear Anxiety premium Reluctance Reluctance Desperation Indifference Panic Apathy Capitulation Depression Despondency12
  12. 12. Weaknesses of groups and teams 1. Homogeneity 2. Contamination We associate with people more like us When we learn others opinions we tend than random: default group of members to over-weight their opinions, especially tends to not be very diverse when they agree with us 3. Conformity 4. Social Loafing We don’t put effort into finding We worry about publicly disagreeing with information and thinking out our own others for social or authority reasons, so opinion when we know others will be tend to agree with leaders opinions supplying their views13
  13. 13. We underestimate how differently others see the world14
  14. 14. …and how differently others see the Market Bears: Others investors are bearish Bulls: Other investors are bullish 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% Large Small No Small Large Large Small No Small Large loss loss change gain gain loss loss change gain gain Bear’s Opinion Bulls Opinion Source: Egan, Merkle, Weber, “Naïve Realism and Investment Decisions”, Manuscript, 2011, based on Barclays Wealth 2008-2010 survey of 620 UK-based investors.
  15. 15. Weakness: Conformity16
  16. 16. On average… Risk Composure M arket Perceived Delegation Belief in Skill Tolerance Engagement Financal Expertise
  17. 17. Individual variation matters Risk Tolerance Composure High Risk Risk High Composure Composure Tolerance Tolerance Low Low
  18. 18. Composure and Risk Tolerance High Composure Low Low High Risk Tolerance
  19. 19. Individual variation matters Delegation Belief in Skill High Delegation Delegation High Belief in Skill Belief in Skill Low Low
  20. 20. Being greater than the sum of your members Diversity Every trustee will have their own information and facts, but not necessarily all the relevant facts Specialisation Some trustees focus on specific areas, becoming better or more efficient at gathering or using information Independence It’s very important that peoples opinions are heard openly and arent limited by other group members Consensus Mechanism required for turning private judgments into a collective decision. Some are better than others22
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