Ben Kumar (pictured), head of equity strategy at 7IM
Over the last decade or so, it has been fashionable to talk about irrational investors – the tendency for people not to do what a model of rationality would suggest.
The work of Thinking, Fast and Slow author Daniel Kahneman is usually mentioned; maybe Nudge author Richard Thaler. And often the perspective has been one where someone's ‘bias' is leading them away from the ‘correct behaviour'.
The thing is, that is not quite right. The word ‘behaviour' muddles two things – what you do and who you are. Activity and identity.
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In other areas, we are really careful not to do that. An obvious example is with children. There are some activities we want to encourage for every child, whether it is wearing clothes in public, looking left, right, left again before crossing the road, or diversifying their diet from jam sandwiches for breakfast, lunch and dinner. We want to bias them towards one thing or another.
Some of those activities are global, some are situational (left, right and left again is the wrong thing to do in 75% of the world). The dietary one might have other context: for a child with food allergies, getting them to "eat some of everything" would not have been a great outcome.
But there are other elements with children we would never dream of trying to change. The things that define their identities. There are dreamy kids and serious kids. Some are reflective, others are impulsive. Some like swings, some like roundabouts. We do not mess with these aspects because they are not activities we are trying to regulate or guide. We are not trying to produce the ‘correct' kid. They are not biased; they are just becoming individuals.
The same is true everywhere else in the world. In any professional sports team, there are activities encouraged through training and personality/physical identities, which need to be embraced for their differences. There is no ‘correct' athlete to aim for.
In a business environment, there are some company-wide activities we want people to follow but different identities are essential across and within departments. There is no ‘correct' employee, because different jobs suit different people. Trust me, you want my brand of intellectual chaos nowhere near an operational excellence meeting.
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When it comes to investing, there are some activities we should encourage: diversifying is up there. But there are lots of other things labelled as ‘behavioural biases' which come down to investment identity.
Whether numbers speak to an investor, or stories; meeting company management is preferable or preferring to keep them as abstract figures; whether falling prices scare or excite, or whether politics matters or is generally irrelevant. There is no ‘correct' answer.
Investors must recognise their identity and then work with it to make sure they are doing the best with what they have got. I lean towards value investing (with a small bit of desire for long-term moonshots), so big US tech stocks are not that attractive to me at the moment. But I absolutely understand how they could be to others.
The ‘behavioural biases' many investors exhibit are not biases at all. They cannot and should not be corrected. Investments can be shaped to fit an identity, rather than trying to change someone's identity to match a certain style of investing.
Ben Kumar is head of equity strategy at 7IM
