Behavioral Finance

AgPa #75: Optimal Investment Committees

Optimal Design of Investment Committees (2023)
Bernd Scherer
The Journal of Asset Management, URL/SSRN

After a long break of almost exactly 3 months – I had several other tasks that required my intellectual capacity – it is time for a new AGNOSTIC Paper. This one examines the design and challenges of investment committees (ICs). Even more important, the author suggests a simple and powerful solution for some of their most common challenges. As someone who regularly enjoys the process of committee-based decision-making, I believe this week’s paper is quite powerful and offers a lot of valuable lessons for both investment managers and their clients.

  • Good theory: ICs ensure the same quality for all clients
  • Bad practice: ICs suffer from psychological biases
  • Solution: Anonymous member-portfolios

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StanStu #1: Cash on the Sidelines

Global stock markets currently hover around all-time highs, last year’s performance was tremendously good, and interest rates are back. No wonder that the media and market strategists recently began to spread an old narrative – the idea of Cash on the Sidelines.

The most fundamental feature of markets and a little thinking effort easily destroys the narrative as it is commonly used. But let’s go through it step-by-step…

  • The Narrative of Sidelines
  • The Problem of Sidelines
  • Perspectives Matter
  • Investor-Specific Sidelines
  • The Psychology of Sidelines

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AgPa #64: Fund Manager Multitasking

Managerial Multitasking in the Mutual Fund Industry (2023)
Vikas Agarwal, Linlin Ma, Kevin Mullally
Financial Analysts Journal 79(2), URL/SSRN

Some days ago, I came across yet another interesting study on manager selection. The idea of this week’s AGNOSTIC Paper is very straight forward. When you hire a fund manager, you want this person to focus on your money and not do much else. Probably no one would agree to a surgery where the surgeon operates on five patients at the same time. So why hire a fund manager who manages more than one fund?

  • Manager multitasking strongly increased from 1990 to 2018
  • Managers who start multitasking tend to have better track records
  • Fund performance decreases significantly after managers start multitasking
  • The number of managed funds amplifies the effect of multitasking
  • Investors put less money into existing funds of multitasking managers

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AgPa #63: Fire the Winners and Hire the Losers

The Folly of Hiring Winners and Firing Losers (2018)
Rob Arnott, Vitali Kalesnik, Lillian Wu
The Journal of Portfolio Management Fall 2018, 45 (1), URL/research affiliates

I am still in my research on manager selection, so apologies to everyone who doesn’t find that too interesting. We already touched the question on what to do with underperforming managers in AgPa #59 and #60. This week’s AGNOSTIC Paper, however, examines this problem somewhat more generally and delivers some really simple (but psychologically hard-to-execute) common-sense conclusions.

  • Current winners tend to be future losers
  • High fees are the most reliable way to underperform
  • Investors should use factor exposures and valuations to evaluate fund managers

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AgPa #62: 10 Questions to Ask Your Fund Manager

The 10 Most Important Questions to Ask in Selecting a Money Manager (1990)
Jack L. Treynor
Financial Analysts Journal 46(3), URL

Continuing with the challenge of asset manager selection, this week’s AGNOSTIC Paper again focuses on the important soft factors of money managers. Jack Treynor, the author of this week’s paper and one of the giants in finance research, presents a short and entertaining checklist “to ensure that the right questions are asked […]”.

  • Does the money manager present his ideas smoothly and without hesitation?
  • Is the money manager clear and confident about his ideas?
  • Do his ideas have common-sense appeal?
  • Are you comfortable with the money manager’s answers?
  • Does the money manager exhibit detailed knowledge of a broad range of companies and industries?
  • Does the money manager react decisively to new developments?
  • Does the money manager have a large asset base?
  • Does the money manager live baronially—with expensive clubs; houses and cars; and travel by the QE II, the Concorde, or the Orient Express?
  • Are his offices impressive?
  • Is the money manager impressively capitalized?

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AgPa #61: Minivans versus Sports Cars

Sensation Seeking and Hedge Funds (2018)
Stephen Brown, Yan Lu, Sugata Ray, Melvyn Teo
The Journal of Finance 73(6), 2871-2914, URL/SSRN

Tell me about the car you drive and I tell you who you are. In the hope of not offending the car enthusiasts too much, this week’s AGNOSTIC Paper relates the performance and characteristics of hedge fund managers to the type of car they drive. As announced in last week’s article, this is a funny example for the important soft factors that investors should consider when selecting an asset manager.

  • Sports car drivers take more risk and deliver lower performance
  • Funds of sports car drivers come with more operational risk
  • Sports-car-driving investors want sports-car-driving fund managers

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AgPa #44: Betting against Quant – Thematic Indices

Betting against Quant: Examining the Factor Exposures of Thematic Indexes (2021)
David Blitz
The Journal of Beta Investment Strategies Winter 2021, URL/SSRN

This week’s AGNOSTIC Paper examines a recent trend in the asset management industry: thematic indices. The sales pitch is simple. With a thematic index you can easily invest in the “next big things”. Artificial intelligence, aging population, e-sports and gaming, healthcare breakthroughs – just name your buzzword and you will find an investment product for it. This week’s paper is among the first that examine such thematic investments through the lens of the major factor premiums.

  • Thematic indices are more volatile and have higher betas than the overall market
  • Thematic indices tend to hold expensive, low-quality stocks with neutral momentum
  • There are still reasons why thematic indices exist

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AgPa #33: World Cups and Stock Markets

Sports Sentiment and Stock Returns (2007)
Alex Edmans, Diego García and Øyvind Norli
The Journal of Finance 62(4), 1967-1998, URL

Given that this week’s AGNOSTIC Paper coincides with the final of the World Cup, I couldn’t resist the temptation. Below you can see a chart of the knockout stage of this year’s tournament. But since you are visiting a nerdy finance website, the focus is not on the results, but on the post-match stock market returns of the playing countries…


You may (understandably) say that this is some nice storytelling but not much more. However, I didn’t made this up to create a story but the idea of this analysis actually comes from this week’s AGNOSTIC paper…

  • Stock markets of losing countries tend to underperform after important matches
  • The effect most likely comes from bad mood after sport losses

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AgPa #23: Trading on the Weather

Global weather-based trading strategies (2022)
Ming Dong, Andréanne Tremblay
Journal of Banking & Finance, Volume 143, 106558, URL/SSRN

People tend to be in a better mood when the sun is shining. That’s nothing dramatically new but this week’s AGNOSTIC Paper shows that this apparently also applies to investors. An investment strategy that went long (short) the stock market index from the country with the best (worst) weather on a particular day generated meaningful (hypothetical) outperformance…

  • The global long-short weather strategy returned 15.2% p.a. between 1993 and 2012
  • The long-only version of the strategy returned 13.4% p.a.

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AgPa #22: Gamification of Trading

Does Gamified Trading Stimulate Risk Taking? (2021)
Philipp Chapkovski, Mariana Khapko, Marius Zoican
Swedish House of Finance Research Paper No. 21-25 via SSRN

Online brokers (Robinhood & Co.) are without question important financial innovations. They offer de-facto free trading and save investors a lot of fees. But they also leverage technology to encourage people to do more transactions. An important part of this is gamification and this week’s AGNOSTIC Paper examines that issue with a pretty cool experiment…

  • Gamification encourages investors to take more risk
  • Inexperienced investors without financial knowledge are most vulnerable

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