Behavioural Investment

Ten Behavioural Advantages Amateur Investors Hold Over Professionals

When discussing the behavioural foibles that impact our investment decision making, it is often stressed that these issues also affect professional investors – seemingly in an effort to allay any notion that expertise insulates them from such issues.  Whilst it is certainly true to state that professionals are not invulnerable, this does not go far enough.  If we think about some of the main challenges encountered by investors around issues such as time horizons, over-trading, overconfidence, misaligned incentives and benchmark obsession, these problems are often exacerbated when investing in a professional context.  Amateur investors* therefore have a number of behavioural advantages:

Of course, amateur investors are not immune from the plethora of behavioural issues that lead to poor investment decision making.  It is, however, important to acknowledge that the investment industry has certain structural features that serve to generate or inflame a particular set of behavioural shortcomings.  In a world of few edges, investors who can avoid them should be sure to do just that.

NB: When I was writing this post I came across an article from Barry Ritholtz that covered similar ground, hopefully the behavioural slant of this article makes it sufficiently distinctive to be interesting. His article is here.

* The term amateur sounds pejorative but this is not meant to be the case – it is simply a reference to those people who hold investments but do not manage them for a living i.e. the majority of individuals who aren’t professional investors.