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What can parole decisions in Israeli jails and football penalty shoot-outs teach us about making better investment decisions?

EQ and Greg Davies

“It’s about building tools that help us make better decisions,” said behavioural economist Greg B Davies, during a speech in front of all 63 Equilibrium Asset Management staff.

Greg, who holds a PhD in Behavioural Decision Theory from Cambridge and for a decade, led the banking world’s first behavioural finance team as Head of Behavioural-Quant Finance at Barclays, is also the founder of Centapse.

He was invited to Wilmslow by Equilibrium founder Colin Lawson and first spoke to staff, before later giving a presentation entitled ‘Understanding the Psychology of Financial Decision Making’ to some of the wealth management company’s clients.

“There is a cycle of investment emotions people can through which include reluctance, optimism, excitement, irrational exuberance, denial, fear, desperation, panic, capitulation, despondency, depression, apathy, indifference, reluctance,” said Greg, whose PhD is in Behavioural Decision Theory from Cambridge,” he said.

“It turns out, for instance, that goalkeepers in professional football dive to the left or right about 90 per cent of the time, yet about 40 per cent of the time the ball goes down the middle.

“On a pure statistical basis, goalkeepers could probably save penalties more if they did less.

“The problem with this, is it’s one thing to fail to save a goal while diving spectacularly in the wrong direction. It’s quite another not to save a goal when you’ve stood in the middle like an idiot doing nothing.”

He added: “For most of us in all walks of life there is this action bias. The temptation, particularly under moments of stress, to be seen to be doing something rather than doing nothing.

“One of the ways that might help with investment is, in times of market crisis or market stress, to sit tight and wait it out and maybe do some housekeeping on the portfolio.”

Greg also said that people tend to buy stories not numbers – and tend to work in one-year blocks.

“Our emotional brain doesn’t see things 12 years from now, we make decisions in the present,” he said.

“In a study on parole decisions in Israeli jails researchers wanted to understand what the biggest influencing factors to whether someone was granted parole or not.

“The most significant variable was how long your case come up after the judge had had a meal.

“If the judge has just had a meal the chances of getting parole is in the 60 per cent region.

“If it’s just before the next meal when glucose levels are low, the chances of being paroled are close to zero per cent.

“What I do know is that the actual responses should not vary according to the judge’s degree of hunger. It’s a completely irrelevant factor. The more tired and fatigued we are, the hungrier we are, the closer to the end of the day it is, the more likely our decisions are going to go to the status quo.

“Given we have some control over when we make decisions, we should be able to schedule important decisions at times when we know we are better decision makers.

“These things make a surprising amount of difference.”