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Alternative Market Briefing

Winning and losing change fund managers' behavior, says study

Friday, November 16, 2018

Laxman Pai, Opalesque Asia:

Winning or losing streaks - making profits every day or losing money every day - played with managers' heads and changed their behavior to the detriment of their portfolios, revealed a new research.

Essentia Analytics, which studies neuroscience and economics to help active managers understand their behavior, found that half of the active equity portfolio managers in the study's sample exhibited some change in behavior after experiencing a winning or losing streak.

"Half of the active equity portfolio managers in the sample showed some change in behavior after experiencing a Winning or Losing Streak - nearly a quarter changed it when winning and 41% changed it when losing," said the study captured in a white paper titled "Holding the Line".

"Those who changed their behavior while on a Winning Streak tended to reduce turnover via making fewer decisions. Managers on Winning Streaks made worse decisions, but it didn't have a major impact on performance because they traded less," said the study.

"If you ask most fund managers or traders whether they behave differently, vis-a-vis investment decision-making when they are on a Winning or Losing Streak, they will say 'probably.' However, very few could tell you exactly how their behavior changes, or whether the quality of their decisions actually improves or deteriorates," said Clare Flynn Levy, founder and CEO of Essentia.

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