Behavioural Aspects of Institutional Investment Decision-Making

Investigating institutional investors' decision-making

The IFoA’s Actuarial Research Centre (ARC) awarded a grant in 2017 to support a significant behavioural finance research programme, specifically focusing on decision-making by institutional investors. The selected research team was comprised of researchers from City, University of London, Ipsos, Leeds University Business School, University of East London and Reverence Limited. The team itself included Professor Peter Ayton, Dr Iain Clacher, Dr Volker Thoma, Colin Strong and David Calfo, who brought expertise from a range of disciplines.

Project summary

The aim of this research project was to explore the decision-making of institutional investors, in particular insurers and pension schemes, and the biases that may affect their investment decisions. These included, but were not limited to, emotional, psychological and political biases. The project explored what "rational" or “optimal” behaviour could be expected from an institution in certain economic scenarios, based on its investment objectives and underlying values. It then explored whether there was solid evidence that behavioural factors, such as human psychology, company culture, corporate politics and conflicts of interest caused them to deviate from optimal behaviour. The research provided a number of practical conclusions that can be used by actuaries working in investment and related areas.

Project highlights

ARC Webinar Series 2021 – Understanding biases in trustee decision making

21 January 2021

Professor Peter Ayton, Professor Iain Clacher, Colin Strong and Dr Leonardo Weiss-Cohen presented their research findings in the first of the ARC Webinar Series 2021. Drawing on experimental and qualitative research techniques, along with a literature review of existing psychology and behavioural economics, the research team concluded that trustees were not immune from decision-making biases and proposed ways in which these could be reduced.

The presentation was followed by a panel discussion and Q&A.   A recording of the webinar is available on YouTube and has been posted on the online learning webpages.

Final Report

21 January 2021

The Final Report, entitled Pension Trustee Decision Making, was launched at the ARC Behavioural Finance Webinar on 21 January 2021. The report investigated potential biases that could arise in group decision making and offered a number of recommendations for enhancing decision making by trustees. In its Foreword, the Behavioural Finance Steering Group highlighted the report’s relevance for anyone who is involved in group decision making, acts as an advisor or makes decisions on behalf of others.

The research findings were discussed by Professor Peter Ayton in an article in The Actuary. Split decisions: Pension trustees and decision-making looked at group thinking and decision heuristics and presented the case for improving the collective efficacy of trustee boards.

Media coverage

  • Professional Pensions published an article on 21 January on the Report entitled ‘IFoA makes recommendations for improving pension trustee judgement and decision making’.
  • Pension Age covered the report in its article ‘IFoA outlines trustee decision making best practice amid evidence of decision biases’.
  • The findings were also the subject of a Burges Salmon blog post in Lexology. 

Project background

To date, a substantial volume of work has been undertaken in the field of behavioural finance to explore the psychological factors affecting investment decisions made by individuals.  In contrast, “behavioural” factors (such as politics or human psychology) affecting decisions and actions made by institutional investors, such as insurers or pension schemes, are less understood.  This could be significant for actuaries working in the areas of investment advice, asset-liability matching, liability-driven investments and investment risk management within institutional investors, such as insurance companies and defined benefit pension schemes. A significant number of actuaries work today as advisors to institutional investors’ key decision-making bodies.  Typical roles could include:

  • Investment advisors to occupational pension schemes
  • Professionals setting the investment strategy for assets of insurance companies
  • Investment strategists for assets backing long-term life insurance liabilities, such as with-profit or annuity funds

Investment objectives and asset allocation decisions for the types of organisations mentioned above would typically be expected to be driven by the long term relationship between the value of assets and the actuarial or accounting value of liabilities. In setting a long term investment strategy, investment actuaries are often required to form judgements and make assumptions (explicit or implicit) based on commonly accepted economic theories.  This usually relies on the expectation of rational behaviour, in line with stated public objectives of these organisations and efficient market hypothesis in various forms.

The objective of this research was to test whether the actual decisions made by organisations, as groups of individuals, are influenced by a wider set of factors, such as emotions, human psychology, company culture, corporate politics and conflicts of interest.  This could provide a better tool kit for actuaries and other professionals in managing risks and making financial projections for these organisations.

Research outputs

  • Behavioral Biases in Pension Fund Trustees’ Decision Making  was published in the Review of Behavioral Finance in June 2019. This set out the landscape in which pension fund trustees operate and make their decisions. The paper reviewed the literature of behavioural finance research applicable to similar situations to identify avenues of further exploration. Preprint
  • Extraneous menu-effects influence financial decisions made by pension trustees  was published in Economic Letters in Feb 2020. The research team tested 252 pension scheme trustees for the influence of extraneous manipulations to the menu of options on investment decisions. They found that trustees were influenced by changes to the menu item mix, context and layout. The paper concluded that care should be taken when preparing information presented to trustees, in order to reduce biases that can be detrimental to pension outcomes. Preprint
  • Pension scheme trustees as surrogate decision makers  was published by Finance Research Letters in April 2021. This found that when setting targets for pension replacement income, trustees project their own preferences instead of reflecting member preferences. Preprint
  • Professional investors make better mutual fund selections  research report found that pension professionals tend to choose the cheapest mutual fund, regardless of past performance.
  • The final report on Pension Trustee Decision Making provided a summary of the research with a number of practical recommendations for actuarial investment practitioners.

IFoA events

  • NED event: Behavioural Finance and Boards, 18 June 2019. A recording from this event is available here. 
  • ARC Webinar Series 2018: Behavioural Aspects of Institutional Investment Decision-Making, 4 October 2018. Professor Peter Ayton (City, University of London) and co-researcher Dr Iain Clacher (University of Leeds) explore some of the early developments in this research programme. A recording of the webinar is available on YouTube and is also posted on the IFoA's online learning webpages.

Presentations

 

Contact Details

If you want more information about our research programmes please contact the IFoA Actuarial Research Centre:

arc@actuaries.org.uk

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Events calendar

  • Pensions Conference 2021

    Online webinar series
    16 June 2021 - 22 June 2021
    Spaces available

    Welcome to the programme for our 2nd Virtual Pensions Conference. This year's conference features 11 webinars offering members and non-members the opportunity to get up to date content from leading experts in the pension industry. There will also be opportunity to ask questions and contribute to the discussion.

  • Spaces available

    Mathematical Futures: The Actuary in a World Transformed – Sir Adrian Smith will outline how advances in data science, machine learning and artificial intelligence in the world of big data will transform the nature of many industries, including financial services. The broader environment within which mathematics is applied will change rapidly, often led by innovative yet disruptive forces outside. These changes will undoubtedly have an impact on the work of actuaries - and the profession will need to adapt quickly to thrive.

     

  • Spaces available

    This session will explore how the new index has revealed previously uncaptured mortality inequalities by using predictive variables at a high degree of granularity. Globally renowned leader in actuarial science Professor Andrew Cairns and his co-investigator Torsten Kleinow will demonstrate the uses of new LIFE index such as the causes of high or low mortality and regional differences in mortality.

  • Spaces available

    Given our commitment to the safety of our members and employees, and as the easing of restrictions in respect of COVID-19 cannot be guaranteed at this point in time, we have decided to hold our AGM virtually again this year.

    The Business of the AGM

  • Spaces available

    Join newly inaugurated IFoA President Dr. Louise Pryor as she explores what we need to do to keep abreast of the changing world – and how we can seize the resulting opportunities – in her Presidential Address, ‘A Learning Society’

  • Spaces available

    The world is changing. The fourth industrial revolution, globalisation and the COVID-19 pandemic are up-ending traditional social and business norms around the world; changes that were once predictable and steady are now faster and more profound.

  • Spaces available

    This is a free webinar on the consultation on changes to the Practising Certificates (PC) Scheme.

    The proposals come from a recent review of the PC Scheme which was the first substantive look at the IFoA’s approach to the requirements and process for PCs since 2010. It responds directly to feedback received on how the current scheme works especially that received from members and PC Holders.

  • Spaces available

    We have entered the global age which is invalidating most of the assumptions upon which our success up till now has depended. For example, in the global planetary society there can be no externalities. Although there is increasing clamour for new ways of thinking, sadly, our attempts to invent such new ways remain trapped in the same historical set of assumptions. The result is that we are faced with three tragedies.

  • Spaces available

    The paper “Asset liability modelling in the quantum era” shall be presented by its authors, Tim Berry and James Sharpe, and chaired by Andrew Smith, Assistant Professor in the School of Mathematics and Statistics at University College Dublin.

  • Spaces available

    Today’s breakneck pace of technological change has an immense impact on leaders—and as a result, on their organizations’ capacity to transform. All too often, executives remain stuck in outdated mindsets and modes of operating, even when they recognize the need to reinvent themselves. Leadership expert Herminia Ibarra upends traditional, introspective advice and says act first—in order to change your way of thinking. Following her presentation, Herminia Ibarra will be joined by Louise Pryor, incoming IFoA President and Hash Piperdy, Managing Director at Epitome Global, for a panel discussion around the themes of the session. The panel will be chaired by Tan Suee Chieh.

  • Spaces available

    The IFoA’s Actuarial Review Team will publish its second thematic review in June 2021. The review is looking at the involvement of actuaries in the pricing of UK home and motor insurance, during a period of significant developments in the sector from both regulation and innovation.

  • Spaces available

    As part of the Behavioural Science Series, David Rooke will explore the leadership capacities and capabilities that may enable actuaries to successfully navigate the challenges of our times. He will discuss how actuaries can apply these principles to ensure the profession succeeds, flourishes, and plays a positive societal role in our global community.

    Following his presentation, David Rooke will be joined by Stephen Mann, CEO at the Institute and Faculty of Actuaries and Anusha Thavarajah, Allianz’s Regional Chief Executive Officer, Life and Health for Asia Pacific for a panel discussion around the themes of the session The panel will be chaired by Tan Suee Chieh.

  • Asia Conference 2021 webinar series

    Online webinar series
    26 July 2021 - 30 July 2021
    Spaces available

    We have made it through 2020 but the COVID-19 crisis continues to have a significant impact on individuals, societies, businesses and the wider economy across the globe. Navigating the world post COVID-19 in an uncertain and highly unstable time brings along many uncertainties, challenges and exciting opportunities. Hence the theme of this year’s IFoA Asia Conference Webinar Series is “Risk. Adapt. Thrive.”

  • Spaces available

    Risk Management Webinar ProgrammeInternal audit is often the Cinderella of the audit world. It’s a regulatory requirement for insurance companies to have an internal audit function, so why not make it as useful as possible?  This session will look at how to link an internal audit plan to the risk register, and how that helps audit committees and boards to spot problems and fix them.