Investing with Ulysses Better Decisions through Behavioural Design - PowerPoint PPT Presentation

Investing with Ulysses Better Decisions through Behavioural Design Greg B Davies, PhD @GregBDavies www.oxfordrisk.com | 020 3941 2801 | enquiries@oxfordrisk.com 1

Which investor is happiest at the end? Portfolio Return Time www.oxfordrisk.com | 020 3941 2801 | enquiries@oxfordrisk.com 2

Sell date, quarterly No nominal losses over any Buy date, holding period of 12 years quarterly or more MSCI World Equity Annualised Returns Zone of Anxiety 0 to -5% to 5 to 10 to 15% <-5% >15% 5% 0% 10% www.oxfordrisk.com | 020 3941 2801 | enquiries@oxfordrisk.com www.oxfordrisk.com | 020 3941 2801 | enquiries@oxfordrisk.com 3

Paying too much for emotional comfort Exuberance Excitement Denial Optimism Fear Reluctance Reluctance Desperation Indifference Apathy Panic Capitulation Depression Despondency 4 www.oxfordrisk.com | 020 3941 2801 | enquiries@oxfordrisk.com www.oxfordrisk.com | 020 3941 2801 | enquiries@oxfordrisk.com 4 4

Destination vs journey www.oxfordrisk.com | 020 3941 2801 | enquiries@oxfordrisk.com 5

Destination vs journey www.oxfordrisk.com | 020 3941 2801 | enquiries@oxfordrisk.com 6

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Knowing your own objectives Imagine you bought $6,000 worth of stock from a now bankrupt company There are two alternatives to recover money… Would you choose X or Y? Would you choose A or B? Alternative A Alternative X Recover $2,000 Lose $4,000 • • Alternative B Alternative Y 1/3 chance $6,000 recovered 1/3 chance nothing lost • • 2/3 nothing recovered 2/3 chance $6,000 lost • • 92% go for A 67% go for X Source: Wang, 1996 www.oxfordrisk.com | 020 3941 2801 | enquiries@oxfordrisk.com www.oxfordrisk.com | 020 3941 2801 | enquiries@oxfordrisk.com 8 8

How risk capacity affects risk profile over time Risk Profile Dynamic risk profile Early in life: risk capacity justifies increase from RT Static risk tolerance In retirement: risk capacity implies decrease from RT Retirement www.oxfordrisk.com | 020 3941 2801 | enquiries@oxfordrisk.com 9

The information we do base decisions on 80% 60% 40% 20% 0% -20% Framing horizon -40% 1 Year 10 Year -60% Dec-1979 Dec-1984 Dec-1989 Dec-1994 Dec-1999 Dec-2004 Dec-2009 MSCI World Index, 1970 – Dec 2013 www.oxfordrisk.com | 020 3941 2801 | enquiries@oxfordrisk.com www.oxfordrisk.com | 020 3941 2801 | enquiries@oxfordrisk.com 10 10

Make more decisions ahead of time Decision Constitution 1. Decision objectives 2. Decision environment 3. Circle of competence 4. Automated actions 5. Contingency plans www.oxfordrisk.com | 020 3941 2801 | enquiries@oxfordrisk.com www.oxfordrisk.com | 020 3941 2801 | enquiries@oxfordrisk.com 11 11

No strategy survives first contact with reality Initiate Terminate Plan Deviate Plan Repeat Reality www.oxfordrisk.com | 020 3941 2801 | enquiries@oxfordrisk.com www.oxfordrisk.com | 020 3941 2801 | enquiries@oxfordrisk.com 12 12

Decision readiness: decide when you decide best Likelihood of Parole Time of Day Source: Danziger, Levav, Avnaim-Pesso (2011) www.oxfordrisk.com | 020 3941 2801 | enquiries@oxfordrisk.com 13

Know Thyself Quantified Self External Opinions Psychometrics Deliberate Practice Risk Attitudes Decision Style Comfort PERCEIVED FINANCIAL EXPERTISE Learning DESIRE FOR DELEGATION MARKET ENGAGEMENT RISK TOLERANCE BELIEF IN SKILL COMPOSURE Panic www.oxfordrisk.com | 020 3941 2801 | enquiries@oxfordrisk.com 14 14

Know thyself Low Composure Low Involvement • Reduce reporting detail • Provide lots of decision Composure and frequency support and interaction • Portfolio construction to • Reduce reporting detail smooth journey and frequency Familiarity Bias Involvement High Familiarity Bias High Impulsivity • Home biased portfolios or • Focus narrative away from familiar assets market conditions Impulsivity • Draw attention to specific • Increase focus on assets in reporting spending plans and goals www.oxfordrisk.com | 020 3941 2801 | enquiries@oxfordrisk.com 15

The sweet spot for better decisions Grant me: Behavioural The serenity to accept what computers do better than people, The courage to let people do what they do better than computers, and… Data Digital The wisdom to know the difference. 16 www.oxfordrisk.com | 020 3941 2801 | enquiries@oxfordrisk.com www.oxfordrisk.com | 020 3941 2801 | enquiries@oxfordrisk.com

17 July 19 www.oxfordrisk.com | 020 3941 2801 | enquiries@oxfordrisk.com

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