Natixis Global Asset Management will donate $1 million dollars to fund a three-year study of behavioral finance at MIT that aims to find better portfolio construction strategies that deliver solid returns but are still compatible with the way most people think about their investments. It’s partnered with Andrew W. Lo, MIT Sloan School of Management professor and director of the Laboratory for Financial Engineering (LFE). Natixis will also share raw data from its global Investor Insights surveys with feedback from 30,000 individuals.

Natixis

Natixis: Investors’ behavior typically hurts long-term returns

“The research we’re funding at MIT will lay the foundation necessary to revolutionize traditional investment strategies designed to help investors build better portfolios and increase their chances of long-term success,” said John Hailer, CEO of Natixis Global Asset Management in the Americas and Asia in a statement.

Investors are known to hurt their own returns by getting in and out of the market at exactly the wrong times. When prices are soaring investors want to buy more and chase returns, and then when prices collapse most people sell to limit their losses. You can see the same phenomenon with inflows and outflows from mutual funds and ETFs, as well as the changing momentum as individual stocks rise and fall.

Natixis and Lo’s research is apparently trying to break that cycle by giving people automated tools that take their preferences into account (risk aversion, financial goals) and manages their portfolio accordingly, separating them from the gritty details.

‘Holy Grail’ of automated, customized investing is possible: Lo

“The Holy Grail of developing automated, customized processes for making better investment decisions is not unique to our times or the financial industry,” said Lo, who is also the founder of AlphaSimplex, an investment advisory firm with $4 billion in AUM.

“But what is unique is the confluence of breakthroughs in financial technology, computer technology and institutional infrastructure that, for the first time in the history of modern civilization, makes automated personalized investment management a practical possibility.”

Presumably people will still be able to move money in and out of the portfolios managed by these ‘automated, customized processes’ so Lo still has to find a way to convince investors not to give in to their bad habits. Finding the Holy Grail of investing won’t help if people drop it and run at the first sign of trouble.