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LGIM Behavioural

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John Roe, LGIM. langcatDeadX Dec 2015

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LGIM Behavioural

  1. 1. 9 DECEMBER 2015 LEGAL & GENERAL INVESTMENT MANAGEMENT 1 Langcat Live 2015
  2. 2. 9 DECEMBER 2015 2LEGAL & GENERAL INVESTMENT MANAGEMENT Behavioural Finance: Matter over mind John Roe, Head of Multi-Asset Funds Legal & General Investment Management
  3. 3. 9 DECEMBER 2015 LEGAL & GENERAL INVESTMENT MANAGEMENT 3 Investing Invested Goal setting Biases can sneak in at all stages of investing
  4. 4. 9 DECEMBER 2015 LEGAL & GENERAL INVESTMENT MANAGEMENT 4 Goal setting Too little risk Paths matter Under the influence
  5. 5. 1. Too little risk - Myopic risk aversion 50% chance win £1,000, 50% chance lose £500 9 DECEMBER 2015 LEGAL & GENERAL INVESTMENT MANAGEMENT 5 Same bet 100 times • Likelihood of losing money: <0.1% with 100 bets • Digital access could increase trading and reduce risk taking Be wary of making decisions in isolation, leading to too little risk taking
  6. 6. 2. Paths matter - Prospect theory 9 DECEMBER 2015 LEGAL & GENERAL INVESTMENT MANAGEMENT 6 GainsLosses Value Investors will accept lower outcomes for a smoother rise • People evaluate decisions from their current states • So paths of investment returns matter • Which of the following is intuitively more appealing? 1. Win £10m, then lose £9m 2. Win £1m
  7. 7. 3. Under the influence - Framing • What we see impacts our future decisions • All information we provide will change future decisions 9 DECEMBER 2015 LEGAL & GENERAL INVESTMENT MANAGEMENT 7 How information is presented impacts decisions investors make
  8. 8. 9 DECEMBER 2015 LEGAL & GENERAL INVESTMENT MANAGEMENT 8 Investing Source: LGIM Gut feel Anchored Neglectful
  9. 9. 4. Gut feel - Availability heuristic • The easier something is to recall, the more appealing it is • What is the ratio of the number of words in English with “R” as the first letter, relative to “R” as the third letter 9 DECEMBER 2015 LEGAL & GENERAL INVESTMENT MANAGEMENT 9
  10. 10. 4. Gut feel - Recency effect • People extrapolate recent events into the future indefinitely 9 DECEMBER 2015 LEGAL & GENERAL INVESTMENT MANAGEMENT 10 Net% FM OW Global Equities Change From Previous Month Performance of Global Equities Between Survey Periods 07/11/2014 13/11/2014 46% 12% 4% 05/12/2014 11/12/2014 52% 6% 2% 09/01/2015 15/01/2015 51% -1% 1% 06/02/2015 12/02/2015 57% 6% 4% 06/03/2015 12/03/2015 58% 1% 1% 02/04/2015 09/04/2015 54% -4% 1% 08/05/2015 14/05/2015 47% -7% 0% 05/06/2015 11/06/2015 38% -9% -1% 02/07/2015 09/07/2015 42% 4% -1% 07/08/2015 13/08/2015 41% -1% 2% 04/09/2015 10/09/2015 17% -24% -8% 02/10/2015 08/10/2015 26% 9% -1% Survey Period Everything we see, read or hear, unduly influences our decisions
  11. 11. 5. Anchored - anchoring and adjustment 9 DECEMBER 2015 LEGAL & GENERAL INVESTMENT MANAGEMENT 11 • Anchor first. Then never adjust enough • Are more or less than 10% of African countries members of the United Nations? • What percentage of African countries are members of the United Nations? Make decisions slowly and reflect on whether past decisions were rushed
  12. 12. 6. Neglectful - base rate neglect 9 DECEMBER 2015 LEGAL & GENERAL INVESTMENT MANAGEMENT 12 • Based on the SPIVA report, the percentage of active European funds beaten by their benchmark ranged from 76% to 83% depending on the period1 1 Source: S&P Dow Jones Indices, LLC. Data is as of Dec. 31, 2014. • What do you think your success at selecting active European equity managers is? Remember, you can’t all beat the odds!
  13. 13. 9 DECEMBER 2015 LEGAL & GENERAL INVESTMENT MANAGEMENT 13 Invested Source: LGIM Single-minded Attached Egocentric
  14. 14. 7. Single-minded - confirmation bias 9 DECEMBER 2015 LEGAL & GENERAL INVESTMENT MANAGEMENT 14 • Facts are then found to support our conclusion, while evidence to the contrary is ignored Additional information on African countries: - Somalia and Sudan are in the bottom three countries globally for corruption. There are three long-running African wars that claimed over 1,000 lives each since 2014 + Real GDP has more than doubled in 20 years and average years of school education more than doubled since 1975
  15. 15. Did the statements change people’s guesses? 1. They decrease my guess 2. They neither increase or decrease my guess 3. They increase my guess 9 DECEMBER 2015 LEGAL & GENERAL INVESTMENT MANAGEMENT 15 Are you making sure you’re considering all the facts?
  16. 16. • Owning something makes it more valuable to you We asked people to value a book we gave people: • People overvalue what they already own. 8. Attached - endowment effect 9 DECEMBER 2015 LEGAL & GENERAL INVESTMENT MANAGEMENT 16 Start with a blank piece of paper!
  17. 17. 9. Egocentric bias • There is a tendency to ascribe more responsibility to the things that you do 9 DECEMBER 2015 LEGAL & GENERAL INVESTMENT MANAGEMENT 17 • How impacted were you by the biases? • People will over-weight successes and their contributions to group outcomes Objectively consider everything and everyone that contributes to an outcome
  18. 18. Investing Invested Goal setting 9 DECEMBER 2015 LEGAL & GENERAL INVESTMENT MANAGEMENT 18 Anchoring & Adjustment Availability and Recency Heuristics Base Rate Neglect Egocentric Endowment Effect Myopic risk aversion Prospect theory Framing Confirmation bias
  19. 19. Papers on Behavioural Biases • Shlomo Benartzi and Richard Thaler, Myopic Loss Aversion and the Equity Premium Puzzle, Quarterly Journal of Economics, 110:1, 73-92, 1995 • Daniel Kahneman and Amos Tversky, Choices, Values and Frames, American Psycologist, 39:4, 341-50, 1984 • Amos Tversky and Daniel Kahneman, Rational Choice and the Framing of Decisions, Journal of Business, 1986, 5251-78 • Amos Tversky and Daniel Kahneman, Availability: A heuristic for judging frequency and probability • Fischhoff, Slovic, and Lichtenstein, Knowing with Certainty: The Appropriateness of Extreme Confidence, 1977 • Daniel Kahneman, Jack L. Knetsch and Richard H. Thaler, The endowment Effect, Loss Aversion and Status Quo Bias, Journal of Economic Perspectives, %;1, 193-206, 1991 • Daniel Kahneman, Jack L. Knetsch and Richard H. Thaler, The endowment Effect, Loss Aversion and Status Quo Bias, Journal of Economic Perspectives, %;1, 193-206, 1991 • Shafir, E.,Choosing versus rejecting: why some options are both better and worse than others, 1993 Memory and Cognition 21 (4): 546–556 • Rogers, Kuiper, and Kirker, Self-reference and the encoding of personal information, 1977, Journal of Personality and Social Psychology, 35, 677-688. LEGAL & GENERAL INVESTMENT MANAGEMENT 199 DECEMBER 2015
  20. 20. Disclaimer and important legal notice This is not a consumer advertisement. It is intended for professional financial advisers and should not be relied upon by private investors or any other persons. Legal & General Investment Management (LGIM) Limited is the Investment Adviser to Legal & General (Unit Trust Managers) Limited (UTM) the provider of Legal & General unit trust products which are all UK authorised unit trusts. Both companies are authorised and regulated by the Financial Conduct Authority. This document should not be taken as an invitation to deal in Legal & General investments or any of the stated investments. Remember, the value of investments and any income from them may fall as well as rise and investors may get back less than they invest. Past performance is not a guide to future performance. Exchange rate changes may cause the value of any overseas investments to rise or fall. Details of the specific and general risks associated with the funds mentioned are contained within the Key Investor Information document for each fund. Multi-Index funds invest in riskier bonds, known as sub-investment grade bonds. These bonds pay higher interest rates to try to provide more attractive income returns. To achieve this, greater risk is taken as the companies are more likely to miss payments or not repay the loan, resulting in the return on the investment falling. At times especially over shorter timescales, lower risk-rated funds may fall in value by more than higher risk-rated funds. An increase in medium to long-term interest rates may reduce the value of investment in funds sensitive to interest rate changes. The value of property is generally a matter of the valuer’s opinion rather than fact. Legal & General does not use or support Distribution Technology's investor profiling technology. Legal & General and Distribution Technology are independent companies. Legal & General uses data and research from Distribution Technology to assist in managing the Multi-Index range of funds. Citywire source and copyright: Justin Onuekwusi is AA rated by Citywire for his three year risk adjusted performance for the period 31 August 2012 – 31 August 2015. Legal & General (Unit Trust Managers) Limited. Authorised and regulated by the Financial Conduct Authority. LEGAL & GENERAL INVESTMENT MANAGEMENT 209 DECEMBER 2015

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