Want a Bigger Bonus? Don’t Be a Hopeless Romantic

Cognitive biases are patterns of behavior that can lead us to make bad decisions and suboptimal judgments. A new research report suggests that they influence the investment choices made by asset managers, creating identifiable lifecycles as to when they generate alpha – and, more importantly, when they stop. The bad news for investors is that the most desirable profile is a rare beast; the worse news is that the most common destroys returns.

Chris Woodcock, head of research at Essentia Analytics in London, analyzed 3.5 million data points from more than 40 portfolios around the world that employ a range of different investment styles and have time horizons ranging from a handful of days to several months. Out of that, he derived 12,000 so-called episodes, tracking from when the managers first bought a stake in a company to when they sold their final share.