Investment Frameworks : De-biased Decision Making in Equity Investing

Because people are irrational in systematic and predictable ways, decision-making processes can be an important driver of investing success if they mitigate biases and enhance objectivity. However, there is little consensus on the best approach to making investment decisions. Many investors rely on informal intuitive decision making guided by unreliable mental narratives, which are automatically generated stories that seemingly explain the immediately available data points. Our perception of evidence is naturally distorted to be artificially coherent with these narratives, so this approach often leads to biased, overconfident choices. At the other end of the spectrum, “black box” quantitative, factor-based investing, driven by statistical inputs and purely algorithmic processes, typically forgoes the benefit of differentiated forward-looking views based on fundamental research and expertise.