Are There Ever Good Behavioural Biases?

Behavioural biases and the effect of human psychology on rational decision making is a topic often discussed in investment management. Both retail and institutional investors are impacted by their psychological wiring, but most of the time the discussion centers around how investors can mitigate the impact of negative behavioural biases on their investment decision making. This post from the Collaborative Fund is refreshing, as it looks specifically at what the author has determined are “positive” behavioural biases that help optimize decision making or improve long-term performance. When an investor is too emotionally attached to their investment thesis or strategy, this can sometimes be looked upon in an unfavourable light given it increases the likelihood one might be susceptible to confirmation or anchoring biases. However, in this piece, the author argues that if one has an emotional attachment to their strategy, this might be what is required to keep the investor from throwing in the towel at precisely the wrong time.

Another interesting segment within the blog post is somewhat of a rebuttal to the recency bias that we’ve highlighted the past couple of weeks in Sagacious. Just as it is hazardous to assign more weight towards recent information that may or may not be noise, it can also be hazardous to assume the future will follow a path exactly like the past. Therefore, how investors absorb new information to update their convictions should take a balanced approach, as there are elements of adaptation at work in financial markets. As Mark Twain is famous for saying, “history doesn’t repeat itself, but it often rhymes."