Nancy Opiela’s article in the May-June 2008 CFA Magazine asks, "Is behavioral transparency more telling than financial transparency?"
E. Ted Prince, (featured in Opiela’s article) the founder and CEO of Perth Leadership Institute (be sure to check out his new white paper, The Financial Psychology of the Presidential Front Runners and Its Impact on U.S. Competitiveness), knows a lot about behavioral finance and a thing or two besides. To quote Prince,
"We’ve trained analysts to look at financial matrices, not at human behavior. To use an analogy, we’re making investment decisions using the 10 percent of matter we can see in the universe. There’s still that 90 percent of dark matter that’s hidden from view that doesn’t factor into anyone’s decisions...each individual has a systematic but unconscious bias on all decisions which have financial impacts and ramifications...if we can identify that bias, we can predict not only the financial decisions the executives might make but the impact of those decisions on overall financial performance and profitability and ultimately determine the financial value and market valuation of the companies they run."
Drawing on years of experience, Prince developed assessment tools to classify individuals by their financial “signature," which is what essentially drives different ‘decision styles’ into three buckets: balanced, resource-centric, and value-centric.
"We’ve trained analysts to look at financial matrices, not at human behavior. To use an analogy, we’re making investment decisions using the 10 percent of matter we can see in the universe. There’s still that 90 percent of dark matter that’s hidden from view that doesn’t factor into anyone’s decisions...each individual has a systematic but unconscious bias on all decisions which have financial impacts and ramifications...if we can identify that bias, we can predict not only the financial decisions the executives might make but the impact of those decisions on overall financial performance and profitability and ultimately determine the financial value and market valuation of the companies they run."
Drawing on years of experience, Prince developed assessment tools to classify individuals by their financial “signature," which is what essentially drives different ‘decision styles’ into three buckets: balanced, resource-centric, and value-centric.
Prince, who believes, "The more financial signatures you have that are value-centric, the better you'll do in terms of your valuation relative to your peers...so you can think of the financial styles as having a direct impact on your profitability relative to your competitive peers,"
is on to something.
Now I don't know what my "financial signature" is, but I won’t be surprised if we have at least two value-centric signatures sitting on this Investment Committee, even on the days when I don't attend. Like the words musician Michael Lee Aday (aka Meat Loaf) sung in his second single hit, “’Cause two out of three ain’t bad.”
is on to something.Now I don't know what my "financial signature" is, but I won’t be surprised if we have at least two value-centric signatures sitting on this Investment Committee, even on the days when I don't attend. Like the words musician Michael Lee Aday (aka Meat Loaf) sung in his second single hit, “’Cause two out of three ain’t bad.”
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For additional reading, you might want to check out the article, Behavioral Finance—Benefiting from Irrational Investors, in the Harvard Business School Working Knowledge section http://hbswk.hbs.edu/item/5648.html
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