Decision-making revamp crucial to exploiting investment opportunities

Investors with investment decision-making processes that embrace uncertainty and manage risk will be the investment winners in the next five years, according to global chief investment officer of Mercer, Tim Gardener, who believes institutional investors need to revamp their decision-making processes.

Gardener, based in the UK, said he was frustrated with the number of clients who agreed there were opportunities in the market but were not equipped to embrace them.

“There is an opportunity for those with capital, but also for those that are flexibility, responsive and robust,” he said.

“There are ways to improve decision making further. You can’t just have the framework right, you have to then look at your behavioural biases and recognise the weaknesses in your decision making.”

Gardener said funds should not place too much reliance on measures which purport to eliminate uncertainty but should ensure the decision-making group can get comfortable with uncertainty. And he believes there should be more diversity in personality type on the investment committees.

“On investment committees in the UK there is a preponderance of actuaries and accountants, but you want there to be a diversity of views, and that won’t necessarily happen if you have the same personality types. How much questioning of ideas can there be when you are coming from the same view? You do want conflict and the challenging of ideas,” he said.

“The investment winners will be those that move from processes which attempt to eliminate uncertainty and control risk, to processes which embrace uncertainty and manage risk.”

However he recognised that while humans can cope with risk they don’t like uncertainty, which means part of creating a good environment for decision making is understanding behavioural biases.

Some of those biases include recency, inertia of thought, repetition, over-optimism, and the illusion of control.

“In the past the industry has looked at risk as a singular concept, volatility, and we have had processes designed to banish uncertainty, we look for facts and solutions. But we have underestimated uncertainty; we have to consider there are multiple futures each with their own volatilities.”

He suggested zero-based decision making and strategic analysis of plausible futures as effective ways of dealing with uncertain market conditions.

“Start with a blank sheet of paper, figure out your preferred strategy and then take account of where you are, don’t start with where you are and plan incremental moves,” he said. “I don’t suggest it for every investment committee meeting but every so often stand back and say these are the circumstances and what do we want to do. This creates an improvement in thinking particularly in times of change.”

In order to reduce the negative impact of behavioural biases he also suggested allocated time to strategic analysis.

“Analyse a number of plausible futures; plan for the most likely future but have contingency plans for the less likely, it means you will have improved speed and responsiveness.”

“Value at risk is more than a VaR calculation, planning for different futures takes time but helps investors understand value at risk.”