Exploring the Behavioural Biases of Institutional Investors
Are elite fund managers subject to the same behavioural biases as retail investors? If so which decisions are most affected?
Selling Fast and Buying Slow: Heuristics and Trading Performance of Institutional Investors is an academic paper that explores these questions. The paper uses data from the Inalytics Peer Group, comprising 783 institutional portfolios and over 4.4 million trades from 2000 to 2016.
The paper is co-authored by Rick Di Mascio, CEO and Founder of Inalytics alongside three academics, Alex Imas from Carnegie Mellon University, Lawrence Schmidt from MIT Sloan School of Management and Klakow Akepanidtaworn from University of Chicago – Booth School of Business.
The research reveals that whilst investment managers have investment skill in buy decisions, selling decisions on the other hand underperform substantially. In the analysis, poor selling decisions cost managers nearly 100 basis points of alpha annually. In fact, the observed selling is so poor that adopting a random selling strategy would actually be beneficial to performance.
The authors discover that even institutional investors are subject to behavioural biases and would benefit from employing the same rigorous research methods when selling as they do when buying positions.
Download the full academic paper here.
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