Behavioural Finance & Investment Strategies

Although behavioural finance has long existed as an alternative theory on the workings of financial markets, the credit crisis and the globl financial crisis shattered investors’ confidence in traditional theories. As financial markets recover, many investors are looking for a more realistic and holistic theory of markets that can explain how investors actually behave under uncertainty. 'Behavioural Finance and Investment Strategies' examines case studies and practical examples on how emotions, intuition and short cuts inform and drive decision making. Why an Applied Behavioural Finance Course? As more investing institutions acknowledge that investor demands and behaviours have changed, a growing number of financial institutions are looking to integrate behavioural finance and behavioural frameworks more deeply into their risk and asset allocation process. Using simple insights into the psychology of investing, this programme will show you how to use ideas from behavioural finance to structure a process for superior performance. Course Objectives At the end of the course, you will be better able to: Understand the principles behind behavioural finance Avoid common investment mistakes and know how to avoid them Make consistently better decisions using insights into the psychology of investing Emulate the behaviours of best-in-class fund managers Recognise and understand many of the behavioural biases at work and devise strategies to deal with them Recognise irrational and emotional investing among your clients Integrate a behavioural framework into your investment management process Seize the opportunities for outperformance in the stock market Who Should Attend Asset Allocators/Portfolio Strategists Portfolio Managers/Investment Advisors Product Developers Marketing Professionals Private Bankers/Wealth Managers Equity and Fixed Income Analysts Hedge Fund Analysts Fund Structurers Family Office Managers/HNW Individuals/Private Investors Supporting publication:
Day 1 Overview Behaviour Finance Moves to Centre Stage What is behavioural finance? The foundations and evolution of behavioural finance Why traditional economics and modern portfolio theory failed in the credit crisis Sweeping away traditional assumptions about the workings of markets Why investors need an in-depth understanding of behavioural finance to operate effectively Case Study : The New Behavioural Paradigm Principles of Behavioural Finance How markets really behave The 3 paradigms of decision theory Financial markets as evolutionary systems and processes Predator-prey relationships in financial markets Different types of markets : Efficient markets Behavioural markets Adaptive markets Turbulent markets Theories of neuro-finance Theories of evolutionary finance Borrowing and learning lessons from : Evolutionary biology Behavioural psychology Thermal dynamics Chaos theory Case Study: How Markets Really Behave Cognitive Science and Complexity Theory Rational thinking and emotional thinking Emotions and feedback loops Markets are defined by their participants Market participants are emotional, not rational Marrying cognitive science with economics and finance What financial markets have in common with naturally occurring phenomena Complex systems of interacting agents Characteristics of complex systems Case Study : Rational Investing Vs. Emotional Investing Investor Personalities and the Psychology of Finance and Investing Behavioural Finance and market cycle analysis The full spectrum of human emotions at work when investing Exhaustion, disbelief and incredulit Doubt, reflection and conversio Faith, hope and charit Euphoria, greed and extrapolatio Fear, panic and loathing Some deeply ingrained human instincts and reflexes The full spectrum of investment personalities Behavioural traits and their impact on an investor’s thinking, action and reflection Using emotional intelligence to reduce the risks of intuitive reasoning Case Study : Behavioural Finance and Market Cycle Analysis Day 2 Biases, Emotions and Market Psychology The Role of Emotion in Financial Markets How emotions and psychology affect the market Problems with emotion and biases Quantifying the impact of psychology and emotion on the cycle How emotions, intuition and short cuts inform decision making Case Study : The Emotional Market Hypothesis Behavioural Biases Factors that influence an investor’s behaviour at each level of the investment decision-making process Hirschleifer’s classification of biases : Self-deceptio Heuristic simplificatio Emotio Social interaction Thinking – conscious and unconscious judgements, beliefs and biases Action – tactics and strategies that follow recognisable patterns of investment behaviour Reflection – observable mood swings between elation and despondency Case Study: Behavioural Biases Quiz Information Selection and Processing Biases Selecting information that is considered relevant Systematic errors in estimating probabilities and judging the attractiveness of different investments Sub-optimal decisions that result from biased information processing Biases related to the processing of selected information : Availability bia Representativeness bia Anchorin Conservatism bia Framing bia Probability matching Overconfidence and the illusion of control Case Study : Forecasting Errors Decision Making and Evaluation Biases New information revealed by feedback on decisions taken Additional biases that affect decision making behaviour: Mental accounting Disposition effect House money effect Home bias Endowment bias Hindsight bias Regret aversion Dealing with Behavioural Biases Differentiating between rational and irrational decision-making behaviours Distinguishing between behavioural biases and behavioural preferences Fighting against the behavioural biases that lead to irrational decisions Dealing with biases in the client’s perception of risk Matching the return expectation with the appropriate risk measure Case Study: Dealing with your Biases Day 3 Behavioural Investing in Practice Behavioural Finance Applications in Private Banking Investor psychology in a post-credit crunch world Confidence levels, emotional factors and investor behaviours What private bankers and wealth managers need to know about behavioural finance Behavioural finance and client risk profiling Integrating behavioural finance into the wealth management process Integrating behavioural finance into the asset allocation process Behavioural finance and new product development for wealth managers Integrating client’s emotional biases into the wealth advisory process Goal oriented investors, target-date funds and lifecycle investing Case Study: Incorporating Behavioural Finance in the Wealth Management Process Behavioural Finance Applications in Fund Management Behavioural finance, the market cycle and asset allocation Behavioural finance and the relative versus the absolute return decision Fat tails and black swans Behavioural finance and downside risk management Unconstrained approaches to investment and behavioural finance Behavioural finance, the style cycle and style investing Style rotation strategies and behavioural finance Behavioural finance, earnings revisions and earnings surprises Valuation and behavioural finance Case Study: Style Investing incorporating Behavioural Factors Behavioural Finance Applications in Investment Banking and Corporate Finance Overconfidence and overoptimism revisited A brief history of disastrous takeovers Why corporate managers need to understand behavioural finance Rational markets, irrational managers The corporate acquisition cycle and irrational managers Behavioural finance, leverage and the optimal capital structure Equity and debt issuance and market timing IPOs and growth stories Course Conclusion