Here is an example of when exploring multiple viewpoints helped check my behavioral bias.
It may have been the summer of 2021, and one of the strategies I managed had generated over 600 bps of alpha. I was feeling good. This strong performance was on the heels of a successful 2020, where the strategy generated over 800 bps of alpha and had experienced a positive March 2020. It felt like a good time to take some gains by reducing the risk budget allocated to the strategy.
The way we had setup our governance was that as PM I had decision rights on this particular decision (with the CIO having the right to over-ride) but we would generally discuss and solicit different viewpoints at our weekly alternatives investment committee meeting.
I walked in to the meeting feeling quite pleased about my idea of taking gains. However, during the discussion, one of the quantitative analysts on my team asked a simple question - “what evidence do you have that the rest of the year will shape up any differently from the scenarios that made us set the original risk budget?”
In the discussion that followed, it became apparent that based on how the strategy was designed, the alpha generated was well within the range of expectations - it wasn’t excessive, and nor were there any probable reasons in the horizon to change course. Instead, I was suffering from an ‘endowment effect’, the behavioral bias that makes one value what they own more highly than they would otherwise. By attributing a greater value to the extra alpha I owned, I was going to make a decision that might have felt good, perhaps even hard to argue (who would argue against ‘taking chips off the table’?). But it was not the optimal one to make.
I set aside my ego, and taking heed of the discussion and evidence presented by the analyst, I changed my opinion and we kept the risk budget at the original level.
This story highlights several important aspects of a how a well designed process can increase consistency in decision making. In addition to data and evidence, employing thoughtful governance, requiring a diversify of opinion, encouraging ‘pleasant controversy’, and having a willingness to change your mind can exponentially increase the quality of decision making, leading to more consistent results over the long-term.
It can be uncomfortable at times, and often your ego will want to get in the way, but you don’t need a process to work 100% for it to be effective.
Image Credit: ChatGPT using the prompt “create a digital art to illustrate a blog post about checking your ego when making an investment decision by using information and a group of people with different opinions”