Snapshots attended a fascinating workshop run by Good Judgement Inc yesterday

Behavioural Finance

Good Judgment is a commercial spin out of a project that was funded by the US Intelligence Department after the forecasting failures of 9/11 and Iraq’s Weapons of Mass Destruction. The project was a big statistically measurable success and formed the basis of Phil Tetlock’s excellent book “Superforecasting: The Art and Science of Prediction”.  The famous behavioural economist Daniel Kahneman was on the project’s advisory board.  Incidentally Michael Lewis has written a book on Kahneman’s work called “The Undoing Project”.  We urge everyone to put these two books on their reading lists.

At the workshop we ran through forecast simulations with attendees from the cabinet office, a search engine, a sovereign wealth fund, an energy trader and like-minded asset management firms.  We were given simple checklist techniques that allowed us to break down complex forecasting problems into manageable pieces while taking out emotional biases.  We will be incorporating some of these latest findings into our investment processes.

Recent advances in Behavioural Finance and Big Data have the power to create a mini revolution in the active asset management industry.  And passive managers who are seeing enormous inflows should consider some of the collective behavioural biases in their strategies.

And Unintended Consequences  

We have been speaking to a number of UK banks to discuss lending trends in the market over the past year.  It struck us that something very peculiar has happened in the UK.  An unintended consequence of the interest rate swap mis-selling scandal in 2012 is that banks now rarely ask corporate borrowers to hedge against rising interest rates.  With the recent hawkish comments from the BoE, interest rates at record lows and rising corporate leverage, now is exactly the time corporates should be doing this.

Snapshots is on the road meeting US investors next week and will resume weekly observations on the 29th September.

By Asif Godall
Deputy CIO