Decision Economics

Can understanding how people think and make decisions give you a competitive advantage?

“Intelligence tests measure important things, but they do not assess the extent of rational thought.”*

The field of behavioral finance is now part of the curriculum for many professional designations including CFA, CFP®, and CIMA. Despite that, very little progress has been made in terms of translating its findings from theory to application.

Decision Economics is designed to educate the advisor on the science of decision making with direct applications for managing client relationships and fostering better investment decisions.

Can Behavioral Finance improve investment results?

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Program Agenda

Decision Economics is a professional development program for financial advisors on investment decision making. The program targets critical phases of the investment process where decision errors are most likely to occur and where opportunities to deliver incremental alpha are most abundant. The goal is to create a decision framework that systematically puts the odds of success in your favor. Decision Economics is delivered over a series of instructor-led workshops and can be customized to suit the needs of each client.

Workshop 1 - The Investment ‘ Philosophy’ Statement (IPS)

The Investment ‘ Philosophy’ Statement (IPS)

Why should I pick you to manage my money? The answer to that question plays a critical role in winning business and retaining clients. In the institutional world, there is little chance you’ll advance past the initial screening process without well-crafted responses. It’s table-stakes. In the retail world, however, the RFP/IPS process may be less formal but the ability to communicate your philosophy and process effectively is critical nonetheless. 

Many top advisors tell us they don’t have a well-constructed investment ‘philosophy’ statement (‘IPS’) that they (or their team) can consistently communicate to prospects and clients. Yet, they all recognize the advantages of one. This workshop is designed to help you communicate your ‘IPS’ in a manner that is authentic, differentiated and impactful. The process of developing an ‘IPS’ can also help build cohesion within the team and better position you to ‘define and defend’ your investment decisions in a post DOL world.

Workshop 2 - Separating ‘Signals from Noise’

Separating ‘Signals from Noise’

As advisors, you’re expected to monitor virtually everything that may impact your client’s portfolios – from world events to the market’s daily ups and downs. The problem is most of what we monitor has zero ‘signal’ value – it’s just noise. But it competes for our attention nonetheless which distracts us from focusing on the data with empirical value to drive capital markets. When we allow this to occur, we run a higher risk of making decision errors.

That’s the focus of this workshop – managing our attention. Herbert Simon, a noted decision theorist and winner of the Nobel Prize in 1978, believed that humans couldn’t possibly be expected to make optimal decisions given the vast amounts of information we needed to sift through and the time constraints we faced. He introduced a term called ‘satisfying’ to describe the use of simplification strategies (heuristics) to find answers that were ‘good enough under the circumstances’. But in the complex world of investing, the use of heuristics has been linked to many information processing errors. He rightly identified that we don’t have an information issue as much as we have an attention issue.

Workshop 3 - Chasing Performance

Chasing Performance

Performance chasing is one of the most well-documented phenomenon in investing. It is also a leading cause of underperformance.  Despite the mantra to buy low, studies continue to confirm that investors do the opposite – they systematically over-commit capital to markets when prices are above trend and expected returns are lowest. The same thing occurs with manager selection. For example, more than 100% of the net flows in the mutual fund industry continues to go to funds rated 4 and 5 stars by Morningstar. The obvious question is whether this is a good strategy or a poor strategy. Our research into the matter would suggest caution.

So, how do you avoid committing capital at inopportune times? That’s the focus of this Workshop. We’ll introduce a concept called Base-rating which can be used to gauge whether capital committed to an asset class or manager is likely to earn an above average rate of return or a below average rate of return. This process is not rocket science and it doesn’t guarantee results. What it does is put you in a position to make a more informed decision. It also puts the odds of success in your favor – something you want to do in the mean-reverting, probability-driven world of investing.

Workshop 4 - Group Decision Dynamics

Group Decision Dynamics

There’s an operating assumption that groups make better decisions – that the diversity of the group leads to a ‘sum is greater than the parts’ outcome. In our experience, this is often not the case due to the confluence of individual biases and group dynamics. In certain circumstances, groups can be just as susceptible to developing ‘blind spots’ as individuals and may even be less likely to learn from past mistakes. 

In this workshop, we explore these topics in detail, including the major individual biases and group decision dynamics that lead to poor decisions. We’ll also introduce techniques designed to get the best thinking of the group on the table, maximizing the odds of making an informed decision.

Workshop 5 - Performance Review Session

Performance Review Session

The performance review session is one of the most critical interactions during the year for both the team and the client. At it’s core, it’s a learning session and not a decision making meeting. In our experience, however, it is often a missed opportunity because it typically doesn’t go much beyond a simple ‘score-carding’ session – ‘the benchmark did X and we did Y’.

When outcomes are primarily viewed through a binary lens – good or bad – without consideration for the underlying decision process, it’s difficult, if not impossible, to separate a bad outcome from a good decision process.  This can lead to a cycle of trial and error decision making with no discernable learning curve.

The key to deliberate process improvement is building a quality feedback loop – including capturing both the environment and rationale for past decisions. In this Workshop, we’ll explore these and other techniques to make both the team review session and the client review session more robust.

*Keith Stanovich, the Chair of Applied Cognitive Sciences at the University of Toronto and author of What Intelligence Tests Miss

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