Tuesday, March 17, 2015

The tech helping investors ignore their emotions

For decades "passive" tracker funds that mirror stock market indexes have been shown to outperform ones actively managed by humans.
A key advantage to automated funds is that they bypass human emotions like fear and greed, which often lead to poor investment decisions.
However, a new wave of tech start-ups say they can redress the balance - by helping fund managers overcome their deepest cognitive biases.
Using big data and behavioural finance techniques, they say they can help you invest more wisely and ethically - as well as outflank the automatons eating your lunch.
Fear and loathing
Clare Flynn Levy was a hedge fund manager for 10 years before she set up Essentia Analytics, a forerunner in the space. Its clients include the likes of Man Group, Union Investment and Artemis Fund Managers.
"Fear and greed drive us to do irrational things, but a lot of it is subconscious. We're driven by our wiring to avoid losses, to be afraid of missing out and to follow the herd but it's just what humans do," she says.

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Our system can look for outliers in normal trading patterns and flag them up right after the trading activity happens so clients can investigate them”
Taras ChabanSybenetix chief executive
As a result fund managers often deviate from preset strategies, holding stocks too long, getting out too early when they're winning, or being overconfident and ignoring risks.
Essentia, however, says it can combat such blind spots by monitoring your trading performance, the context in which you made investment decisions, and then correlating the two.
Put simply, you tell the system about your investment plans, price targets, risks you're looking out for - even how many hours' sleep you had last night or whether you woke up in a bad mood.
Algorithms start to recognise your behavioural ticks and alert you.
"It might send you a message to say, 'FYI, here are two stocks you hold that are starting to show the same characteristics that have got you into trouble before, so you might want to have a look,'" says Mrs Levy.
"You make the ultimate decision. It just helps you to stay the course and do what you'd said you would do and not get side-tracked by your own emotions."
For more details,