In the current investment environment, behavioral finance is relevant as we assess the tradeoffs between active, passive and passive plus strategies. Additionally, we wrestle with what is likely to be a low-return environment influenced by automated trading programs, newly devised (and largely untested) quantitatively composed instruments, and ceaseless flows of data-driving market activity. A strategic, long-term approach will add value amid what can seem like chaos; those who devise such approaches need to be aware of their own unintended biases.
Effective governance of an investment portfolio requires institutions to consider an array of risk- and return-based information about asset allocation, manager selection and performance evaluation. To be good stewards and make better decisions, committees should be cognizant of the way in which less-than-ideal psychological influences are at work in most human decision-making.