Behavioral Biases: What Is the Weakest Link in the Investment Profession?

Emotions are often seen as dangerous forms of weakness. Yet studies show that in everything we do, in life as well as in the investment profession, “thoughts, feelings, and actions . . . are inextricably linked at both the mental and biochemical levels”.

The mechanism of incentive and fear makes investing an inherently emotional process. The demands of specific investment decision-making roles can evoke differing emotions and behavioral biases in those involved. A sell-side analyst’s conflict-of-interest dilemma, for example, may require dealing with a qualitatively different set of behavioral pitfalls than that of a portfolio manager. Similarly, the behavioral biases that a sell-side analyst may often encounter — dissonance, for example — might be far removed from, say, the overconfidence that a portfolio manager may regularly confront.

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