Investors Making Conscious the Unconscious


New York – A recent article stated: “Investment decisions aren’t really about deliberating risk and return. Surprisingly often, they are swayed by subconscious decisions and produce knee-jerk reactions.” The article explores the benefits investors can obtain from behavioral finance, a field that investigates the relevance of psychological theories to financial events.

Behavioral finance is being applied by several independent research firms that help investors improve their portfolios’ performance through the joint implementation of psychological and financial theories.

The author of the article is Michael Ervolini, CEO of Cabot Research, a behavioral finance firm based in Boston. Mr. Ervolini highlights the fact that about 95% of all our thinking occurs in the unconscious brain where we store beliefs, biases, and emotions that emerge in our daily actions without being reviewed or controlled by our conscious brains. While many of these unconscious forces are crucial in assertive decision-making, they can also hamper investment thinking and push equity managers into erroneous decisions.

Through a scientific analysis of a portfolio’s history, Cabot Research helps the manager to identify persistent (but unidentified) behavioral tendencies that might be undermining performance. The firm’s ultimate goal is to aid managers better understand where their judgments are strongest and where they can be improved, a process called Self-Awareness.

The firm’s flagship service is called Cabot Behavioral Analysis (CBA). CBA is a full analytical process that includes four highly customized features: 1) Portfolio Analysis: Disciplined evaluation of the portfolio’s history to identify trends/behaviors; 2) Daily support: Highlights daily stock-by-stock signals to guide the manager on making better decisions; 3) Quarterly Review and Update: Provides feedback on how the manager’s shifts are adding alpha to each of the positions and support on how to make these useful shifts a permanent part of the manager’s process; and 4) Annual Comparisons: Tracking shifts and improvements on a yearly basis.

Other behavioral finance independent research firms tracked by Integrity Research include Behavioral Economics Consulting Group, Investment Frontiers Research, and Market Semiotics, among others.


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