Institutional Investors Make Two Common Errors

Posted on September 28, 2012 | Investor Update

“Almost three-quarters (74%) of investors say they have changed their approach to risk management in the past five years, and a similar proportion (70%) are more confident that their current approach to risk management is right for volatile markets.”

This is the finding of a recent survey of 482 institutional investors by Natixis Global Asset Management. If the finding doesn’t inspire confidence, that is because it shouldn’t. The numbers show that though most of the surveyed institutional investors thought their previous strategy needed to be changed, they view their current strategy as being the right one. It seems logical that five years ago, those very same professionals thought they had the correct strategy in place.

The data highlights two common behavioral finance errors: recency and overconfidence.

Recency is defined by Merriam-Webster as “the quality or state of being recent.” Behavioral finance describes it as forecasting future events based on recent conditions. If the markets are currently volatile, recency bias causes an investor to believe the markets will be volatile into the future. Eight in 10 global institutional investors told Natixis that market volatility is here to stay. We have seen similar examples in our weekly Sentiment Survey. Bearish sentiment hit a peak of 70.3% on March 5, 2009, literally days before the bear market bottomed out and stocks staged a huge rebound.

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