Offshore Capitalist

Research tells me something I already knew

A significant number of my clients are couples, who make investment decisions as a team.  It is common for each partner to have a different attitude towards investment risk.  I have long felt that couples often make more ‘well rounded’ balanced and structured investment decisions than individuals.  Some research just out seems pertinent.

Abstract from the paper:

We study the effect of team decision-making on bubbles and crashes in experimental asset markets of the kind introduced by Smith, Suchanek and Williams (1988). We find that populating such markets with teams of size two instead of individuals significantly reduces the severity of mispricing. In particular we observe that under our teams treatment, deviations in prices away from intrinsic value are significantly smaller in magnitude, shorter in duration and associated with lower volume and price volatility.

As the Investors Chronicle reports:

In investing, two heads are better than one, according to new research.

Stephen Cheung of the University of Sydney conducted laboratory experiments in which people traded fictitious shares, which were designed so that it was quite easy to identify their intrinsic value and thus to identify mis-pricing. He compared the prices generated by people trading as individuals with those generated when two people teamed up to trade for a joint account.

He found that, whether people traded as individuals or in pairs, price bubbles often emerged. But these were smaller when people traded in pairs. And pairs generated less price volatility, and traded less often, than individuals.

This suggests that teams, even of just two, work better than individuals. Our individual irrationality can be reduced, although not eliminated, by working with someone else.

Of course, any financial advisor will tell you the benefits of working with them, as a ‘team’!

via Do you think you’re better off alone? – Investors Chronicle.

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