Beware emotion in investment decisions

Colin McLean, of SVM Asset Management, will tell delegates at the Actuarial Profession’s annual risk and investment conference, 13-15 June, in Edinburgh, how investment decisions can be improved by better documentation, rigorous self-scrutiny and critical evaluation of company accounts.

Mr McLean said: “People are influenced by how information is presented to them, and it can overcome rationality. Investors failed to identify the risks in Royal Bank of Scotland and HBOS, as very few negative words appeared in their annual reports. We need better analysis of the language of company reporting.”

The relentlessly positive language of company reporting can lead analysts to make favourable recommendations based not on facts, but on how confident management seem to be. Analysts’ use of phrases like “upbeat statement” and “reassuring tone” can point to this.

Another unconscious trap to watch out for is the desire for consensus within decision-making groups. Mr McLean said: “A preference for consensus often leads to insufficient flexibility, to not accepting contrary evidence or to becoming over-confident. Groups need to challenge assumptions, and to find mechanisms for taking in contrary evidence.”

Mr McLean claimed that recognising the impact of unconscious emotion is the first step to protect against its unhelpful influence. “Emotions are not wrong, but it is useful to recognise the subtle ways in which they may affect investment decisions,” he said.

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Enquiries: Tel. Liz Bury on 020 7632 2181 or email elizabeth.bury@actuaries.org.uk

Notes to Editors

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