How Monkeys and Peanuts Can Help You Gather AUM
January 27, 2015
by Dan Solin
Investment strategies used by hedge funds have evolved over the years, although the biggest changes have come in the use of computers to develop portfolios. Rosetta Analytics is a woman-founded and woman-led CTA that's pioneering the use of artificial intelligence and deep reinforcement learning to build and manage alternative investment strategies for institutional and private Read More
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Monkeys love peanuts. To understand how that relates to gathering assets under management (AUM), let’s revisit a study demonstrating that emotions drive decisions.
As advisors, we like to believe that prospects make decisions in a dispassionate, objective manner after carefully assessing the merits of our offerings. But this assumption is often untrue.
The role of emotions in decision-making
Emotions have a significant impact on our ability to make prudent financial decisions. One study (reported here) looked at how people with brain lesions made investment decisions. The lesions caused an inability to experience emotions but did not affect IQ or capacity to think logically.
Participants were given a gambling-like task to complete. Through logical thinking, they could maximize the possibility of gain. Of the 41 participants in the study, 15 had suffered damage in areas of the brain affecting emotions. These brain-impaired participants adopted the most profitable approach to the gambling task.
Participants without brain impairment reacted emotionally and, ultimately, irrationally. In short, their emotions overtook the rational part of their brain.
One of the study’s authors compared this result to the behavior of investors when the stock market declines. Many investors flee to safety and abandon stocks for bonds, even though over the long term stocks have a higher expected return. Actually, stocks have an even higher expected return when they have declined in value.
While this study demonstrates how emotions may impair rational decision making, negative outcomes aren’t always the case. Emotions can lead us to the right decisions too. According to one of the study’s authors, “If you look at most of the decisions we make in our lives, emotions are key to their success.”
When prospects are considering whether to retain you as their advisor, a significant component of that judgment (for better or worse) will be emotion, not fact.
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