Behavioural Finance

Project summary

The aim of this research project is to explore the decision-making of institutional investors, in particular insurers and pension schemes, and the biases that may affect their investment decisions. This may include, but not be limited to, emotional, psychological and political biases. It is expected that the project will first explore what "rational" or “optimal” behaviour could be expected from an institution in certain economic scenarios, based on its investment objectives and underlying values.

 It will then explore whether there is solid evidence that “behavioural” factors, such as human psychology, company culture, corporate politics and conflicts of interest, cause them to deviate from optimal behaviour. The research will then make practical conclusions that could be used by actuaries working in investment and related areas. For example, one possible output of the research could be a suggested governance structure an organisation could put in place to manage these biases and conflicts.

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 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 concludes that trustees are not immune from decision-making biases and propose ways in which these could be reduced.

The presentation was followed by a panel discussion and Q&A. The full webinar can be viewed here.

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 investigates potential biases that can arise in group decision making and offers a number of recommendations for enhancing decision making by trustees. In its Foreword, the Behavioural Finance Steering Group highlights the report’s relevance for anyone who is involved in group decision making, acts as an advisor or makes decisions on behalf of others.

Professional Pensions article

21 January 2021

Professional Pensions published an article on the Report entitled ‘IFoA makes recommendations for improving pension trustee judgement and decision making’.

Pension Age article

22 January 2021

Pension Age also covered the report in its article ‘IFoA outlines trustee decision making best practice amid evidence of decision biases’.

NED Event: Behavioural Finance and Boards

18 June 2019

Substantial 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. The IFoA has commissioned research through its Actuarial Research Centre (ARC) into how institutional investors make investment decisions which is due to be completed this year. These results could be significant for investment committees of insurance companies and pension schemes. A recording from this event is available here. 

ARC Webinar Series: Behavioural Aspects of Institutional Investment Decision-Making

4 October 2018

Following the successful launch of last year’s webinar series, the Actuarial Research Centre (ARC) has produced a further series of webinars in 2018 to showcase its largest cutting-edge research programmes, addressing some of the significant challenges in actuarial science. In this webinar, we hear from the Principal Investigator of this research programme, Professor Peter Ayton (City, University of London) and co-researcher Dr Iain Clacher (University of Leeds). By watching this webinar you will learn about the objectives of this research programme and some of the early developments since its commencement in January 2018. A recording of the webinar is available on YouTube and is also posted on the IFoA's online learning webpages.

This webinar was sponsored by Aon and Invesco.

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 is 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

The expected output of this research is to explicitly draw out some of the key assumptions made about how institutions should behave rationally in certain scenarios and then test their validity.  Practical recommendations will then be produced which actuarial investment practitioners could use in their work. The research team have now produced a literature review which aims to better understand the relatively unexplored field of investment decisions made by pension fund trustees and identify future avenues of further exploration. This paper starts by setting out the landscape in which pension fund trustees operate and make their decisions, followed by a literature review of the behavioural finance research applicable to similar situations.

Presentations to date

• Professor Peter Ayton gave a presentation at the Australasian Actuarial Education and Research Symposium, Nov 2019 
• Dr Leo Cohen gave a keynote speech at the Professional Pensions Conference, Nov 2019
• The research team gave a presentation at the IFoA's Investment Strategy for DB and DC Pension Funds seminar, Sept 2019
• Dr Iain Clacher gave a presentation at a PLSA meeting showcasing some of the early findings of this work, June 2019
• Presentation to the Competition and Markets Authority, May 2019
• Invited talk at the FCA seminar series, Jan 2019
• Dr Iain Clacher gave a webinar titled: All Too Human: Behavioural Finance Biases in Trustee Decision Making for The Financial Services Club, May 2020. Download a copy of the slides