Quantitative funds fall victim to emotional decision making

Market turmoil has inclined some investors to allow emotions to dominate their decision making. Down days can induce fear, which can be quickly be replaced by greed during a recovery. Unchecked emotions can have a devastating impact on investment performance, yet the biggest casualties of the summer appear to be the supposedly rational quantitative funds

The most common explanation offered up by some of quants for their appalling recent returns is that the market swings of the summer have been so extreme and unlikely that their well constructed and essentially sound quant models were unable to cope. The best example of this is provided by David Viniar, CFO of Goldman Sachs, who stated: "We are seeing things that were 25-standard deviation events, several days in a row." While statisticians debate the probability of such an event, there seems to be some consensus that it should occur once every 100,000 years. This description of the recen...