Investment: When it’s the mind that matters

Investment: When it’s the mind that matters

It’s certainly a question that may have surfaced in the minds of those attending a recent masterclass in ‘behavioural finance’.

But according to Mark Tapley, executive director at London Business School’s BNP Paribas Hedge Fund Centre, experimental research can go some way to explaining some of the puzzles that crop up in the world of investment.

Mr Tapley, who was invited to run the masterclass at the request of the Jersey branch of the Securities and Investment Institute, is ideally placed to link the two disciplines, having studied philosophy and psychology at Oxford, negotiated a 26-year career in investment management, latterly as group chief investment officer at WestLB Asset Management, where he was responsible for the management of around $30 billion.

Although now officially retired, he spends a good deal of his time teaching MBA students and in doing so has gone back to his academic roots.

He explained that behavioural finance started to become ‘alive’ in the 1990s.

‘The reasons were two-fold: academics who study the markets found it very difficult to explain some of the things we observe in investment markets.

For example, why are large capitalisation growth stocks such poor investments in the longer term? ‘The other thing we can’t really explain in standard finance is why people in certain circles are not risk-averse, but will seek out risk.

Behavioural finance uses psychological research to explain why people who are rational wealth maximisers try to do things that don’t seem to be rational at all.

‘Some experimental psychologists looked very hard at the way people make decisions about uncertain outcomes,’ said Mr Tapley, ‘notably Amos Tversky and Daniel Kahneman (who in 2002 was awarded the Nobel Prize for economic sciences).

The research grew out of teaching postgraduate students and seeing that they were making familiar errors, year after year.

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