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

  • Spaces available

    A panel discussion with investment representatives discussing the impact of investment on climate change and vice versa.

    This event is part of The Road to Glasgow: IFoA’s Sustainability Thought Leadership Series which will provide a platform for prominent contributors so that our members and others can understand the perspectives of a wide range of parties interested in the climate debate.

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    Climate change is one of the greatest risks facing our world today. Addressing it will require multi-faceted solutions. Through this panel session, we will explore the different levers that can be used to meet net-zero targets including climate science and data, government engagement, and mobilising green finance.

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    How governments and societies collectively respond to the climate crisis is increasingly being analysed through the lens of intergenerational fairness. Our expert panel will assess and explore the extent to which inter-generous fairness is being considered in climate policies, the lessons from those countries who are leading the way on fairness and justice in climate interventions, and more.

  • The Growth Mindset for Actuaries

    13 October 2021 - 8 December 2021

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    This practical course is aimed at actuaries at any stage of their career who want to develop their own growth mindset and apply it to their work setting and personal or professional lifelong learning. The content of the course builds on the lecture given by Dr Helen Wright on Growth Mindset as part of the President’s 2021 Lecture series, and will be delivered over a period of 2 months, from mid-October to early December.

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    The climate crisis and the degradation of our planet will affect societies everywhere. How we address these threats will require solutions that transcend borders. As a global profession, the actuarial community is well-placed to consider and propose effective risk management solutions to help manage the climate crisis.

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    Content will be aimed at all actuaries looking to understand the issues surrounding mental health in insurance and in particular those looking to ensure products and processes widen access for, and are most useful to, those experiencing periods of poor mental health.