Behave Yourself!

I seldom write about specific products, but every once in a while, something comes along that makes me take notice.  So much of the product universe is cluttered with knock-offs and me-too versions of pre-existing ideas with one or two minor variations.  As a result, there have been relatively few products that have come out in the recent past that offer truly unique value propositions.  Obviously, there’s not likely to be much utility in a product that is a near duplicate of something that already exists.

One product that really is unlike anything else I’ve seen lately is the Purpose Behavioural Opportunities Fund.  Billed as ‘Canada’s first behavioural finance fund’, it is available both as a mutual fund (the F Class fund code is RAM 361) and as an exchange traded fund (the ETF ticker is BHAV).  While a little more expensive than I’d like (the management fee is an identical 1% for both structures), the product does something that no other product in Canada does: it aims to capitalize on the growing body of evidence that many investors are their own worst enemy.

One of the tag lines that the product uses when promoting itself is: “understanding bias is a part of risk management”.  That’s part of why I find the product so intriguing.  To date, there are relatively few advisors who have recommended the product, but I suspect that that’s because there are relatively few who will acknowledge that they, themselves, are susceptible to biased decision-making.  The thing is, when you consider that Nobel prizes have been won by esteemed people like Daniel Kahneman (Thinking Fast and Slow), Robert Shiller (Irrational Exuberance) and Richard Thaler (Nudge and Misbehaving), it should be obvious that the concept has become not only highly credible, but downright mainstream.  If anything, I’ve been wondering what took the product development propeller heads so long to come up with a product that is so clearly needed in the marketplace.

A big part of the problem, for advisors and investors alike, is that they often somehow think the quirks that the behaviouralists have uncovered apply to other people, but not to them.  If there’s one thing that the research shows, it is that humans are almost universally susceptible to mental shortcuts (called ‘heuristics”) and oddball quirks.  That means you.  That means me.  That means pretty much everyone.

As a means of demonstrating these tendencies, the folks at Purpose have even released a handy little mousepad that I use in my office.  It provides regular reminders of the pitfalls and challenges we all face.  My humble mousepad asks me a series of questions that might very well have behavioural implications associated with them.  For instance, it implores me to ask myself:

  • Have you considered contrary opinions to your own? (confirmation bias)
  • Why do you believe the market is pricing some investments incorrectly? (overconfidence)
  • Have you considered why a certain investment might not work out? (causal thinking)
  • Are you chasing performance or a hot trend? (herding and recency bias)
  • Are you selling to avoid realizing a loss in another investment? (loss aversion)
  • Are you blaming others or external factors for poor performance? (self-attribution)

My experience – and therefore and my opinion is that most financial advisors lead “unexamined lives”. They grew up in a world where finance was considered to be empirical and scientific.  The trouble is, some of the world’s brightest minds have devised some truly devious tests and experiments to demonstrate that we’re not nearly as rational as we purport to be.  Neo-classical economics is rooted in the presumption that people are utility-maximizing actors who accurately process information to reach rational decisions that make the most of their own self-interest.  Accordingly, most advisors presumptively think that traditional financial screens and tests are presumptively helpful.  The evidence, however, shows that that is often not the case.

Finally, we have a product in Canada that challenges the prevailing orthodoxy and sets out to find new ways of managing risk and enhancing return.  The Behavioural Opportunities Fund is just over one year old now, so there’s not enough information to draw meaningful conclusions about what it’s performance may or may not mean.  I believe this is an idea (and product) whose time has come.

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