Underperformance of Actively Managed Portfolios: Some Behavioral Insights

Abstract

Two glaring anomalies in investment management are apparent: (1) after fees, active portfolio managers do worse than market indices, and (2) clients continue to pay for services they don’t receive. The purpose of this paper is to offer explanations of these anomalies from a behavioral perspective. We explore some of the cognitive biases that perpetuate active management and subsequent underperformance, including herding, disposition, and endowment effects, as well as conservatism and status quo biases, overconfidence, and agency problems. Investors’ continued use of active managers despite persistent disappointing returns is attributed to being victims of framing effect, hot-hand fallacy, lack of knowledge as well as intimidation or insecurity, and status quo bias. We propose some ways that portfolio managers and investors could improve their decision making.     

The Government Transformation Programme of Malaysia: a successful approach to public service reform

The 2009 Malaysian Government Transformation Programme (GTP) could be useful as a model for reform given its positive impact on improving public services in targeted key result areas. This paper assesses the GTP's approach in the context of the wider debate on whether reforms should be based on best practices or whether they should be diagnostic or problem-solving in approach. The GTP's success was largely the result of blending both approaches. The GTP experience in Malaysia provides a number of insights and lessons for delivering intelligent reforms quickly and effectively.     

Buffett’s alpha: further explanations from a behavioral value investing perspective

Warren Buffett has had extraordinary success as an investor, but there is no agreement as to why. Some academic researchers attribute his performance to mere luck. Frazzini et al. (Financ Anal J 74(4):35–55, 2018), concluded that his alpha is due to leveraging safe, high-quality, and cheap stocks. However, there has been no analysis to date of Buffett’s performance from a behavioral perspective. We argue that Buffett’s success is partly due to qualitative and psychological factors, including tenacity, patience, avoidance of overconfidence, organizational culture, and the reputation effect. Using information from shareholder letters, writings, interviews, and speeches by Buffett and his colleague Charlie Munger, we demonstrate how such psychological factors, together with the quantitative findings of Frazzini et al., render a more complete and satisfying explanation of Buffett’s alpha.

     

Paid work,life-work and leisure: a study of wellbeing in the context of academic lives in higher education

Living, working, leisure, and well-being are of increasing concern to educators, policy-makers, governments and people generally. The aim of this research note is to investigate the relationships between paid work, life work and leisure in terms of well-being associated with activity. The research used a modified experience sampling method for a one-week period with a staff group based in an educational institution. The data collection period included a bank holiday (three days holiday and four days work). A mobile phone was used to collect data eight times a day, over seven days, on activity, enjoyment, interest, visual interest, challenge, skill and happiness. Data analysis showed a significant correlation between enjoyment and happiness; enjoyment and interest; and visual interest, which also correlated with happiness. Enjoyment and happiness were experienced more in leisure than in paid work and life work. Level of enjoyment was greatest when skills were greater than moderate challenge in activity, though high enjoyment was more frequent when moderate and high challenge were met with equal skills (satisfying conditions of ‘flow’). High enjoyment came as much from paid work as from leisure. The findings replicate and extend earlier research, and the research note emphasises the importance of measures of enjoyment in the investigation of national wellbeing.