To Err Is Human, but Smaller Funds Can Succeed by Mitigating Cognitive Bias

FEATURE | SMALLER FUNDS CAN SUCCEED BY MITIGATING COGNITIVE BIAS

By Bruce Curwood, CIMA®, CFA®

he evolution of investment manage 2. 2000–2008: Acknowledgement, where Diversification meant simply expanding the ment has been a long and painful plan sponsors discovered the real portfolio beyond domestic markets into T experience for many institutional meaning of risk. less-correlated foreign equities and return plan sponsors. It’s been trial by fire and 3. Post-2009: Action, which resulted in a was a simple function of increasing the risk learning important lessons the hard way, risk revolution. (more equity, increased leverage, greater generally from past mistakes. However, foreign currency exposure, etc.). After all, “risk” doesn’t have to be a four-letter word Before 2000, modern portfolio theory, history seemed to show that equities and (!@#$). In fact, in case you haven’t noticed, which was developed in the 1950s and excessive risk taking outperformed over the there is currently a revolution going on 1960s, was firmly entrenched in academia long term. In short, the crux of the problem in our industry. Most mega funds (those but not as well understood by practitioners, was the inequitable amount of time and well-governed funds in excess of $10 billion whose focus was largely on optimizing effort that investors spent on return over under management) already have moved return. The efficient market hypothesis pre risk, and that correlation and causality were to a more comprehensive risk management vailed along with the rationality of man, supposedly closely linked. strategy, also known as enterprise risk grounded in sound economics. The tools management (ERM), with very positive within the investment industry were some The wake-up call came during 2000–2008, results. Will smaller funds be able to over what basic. The personal computer was just when returns mean-reverted to their his come the governance gap (fewer resources, coming into vogue, and variance, standard torical average and investment funds shud lack of scale, etc.) and cognitive biases to deviation, and correlation were the key dered under the weight of three disasters adopt these new risk-managed approaches? measures of risk. Most funds used asset- in one decade: the “tech wreck,” the global Or will apathy, inertia, and herding prevail liability modeling and some Monte Carlo financial crisis (GFC), and the European such that smaller funds continue to invest theory in conducting their annual or tri- debt crisis. As equities fell nearly 50 per as they have in the past, concerned more annual asset allocation exercises. Sponsors cent during the GFC and most assets with with asset returns than meeting liabilities focused on their assets (not their liabilities), any credit exposure were also negatively or their primary goal? Risk management and the spotlight centered on the average impacted, investors had few places to hide is now firmly ensconced in the recent forecasted return rather than the full range to avoid the market downdraft other than investment literature. But knowing the of possible outcomes, perhaps anticipating government bonds and gold. Normal stan right answer and implementing the best an occasional one- or, at most, a two-stan dard deviation and correlation were fully approach are two very different things, so dard deviation temporary setback, in an exposed as unstable, inconsistent, and of this article will focus on overcoming inves ever-rising equity market. Tail events were limited value in a stressed environment. tor irrationality by mitigating cognitive largely ignored, with most additional effort Pension surplus in the United States fell bias. Keep in mind that theory and practice concentrated on adding value through from 130 percent in 2000 to less than seldom align, and viewpoints vary at any active management, and tracking error 85 percent in 2008, and endowments gave one time about the best approach, resulting denoted the main measure of active risk. back most or all of their cumulative gains. in leads and lags in behavior. Capital markets were nevertheless favorable Investment results were similar around the and equities well-rewarded throughout this world. In fairness, after the first calamity An Historical Perspective on Risk timeframe, with only brief downturns. You some funds tried to diversify into alterna Risk management has evolved through often saw articles with titles like “Why Not tives (hedge funds, private equity, infra three noticeable periods since 1980: 100% Equities?” Academics and practi structure, and so on), but they forgot about tioners alike tended to treat investments as a the three deadly portfolio sins: leverage, 1. Pre-2000: Acceptance, where risk was science (e.g., physics, subject to natural law) illiquidity, and the lack of transparency in largely ignored. where quantitative analysis was king. many derivative products. These sins mag

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nified embedded market risks. Then, as our Since 2009 and the perfect investment becomes less stable), and co-variation economic and banking systems teetered, storm, a plethora of books on risk manage (trading flows matter), better explain the the majority recognized the true meaning ment and behavioral science have detailed complex dynamic world we live in and the of proper portfolio diversification and the the lessons learned. A variety of new and effect of irrational investors on the markets. benefits of risk management. In short, interesting investment solutions have been Therefore changing peoples’ views and out investors realized that the global economy generated (risk parity, dynamic asset alloca dated practices are a large part of the solu is a complex, tightly coupled, nonlinear tion, defensive equity, liability-responsive tion, which means behavioral science is system that is turbulent and nearly impos asset allocation, liability-driven investing, also an important prescriptive element. sible to predict, and that equities and vari goal-oriented investing, etc.) and more reli Larger institutional investment funds have ous risky assets could underperform for able tools have been utilized (e.g., condi seen the light and have taken action, and a prolonged periods. There are just too many tional Value-at-Risk, multi-factor analysis, risk-management revolution has taken variables to consider, including investors’ stress testing, scenario analysis, and cash hold, with corresponding changes in gover emotions. People are often irrational, so flow and liquidity reviews). Computer nance to limit cognitive error. the markets can be irrationally exuberant, capabilities advanced tremendously and leading to bubbles and crashes. There are investors were willing to admit to their foi Since 2008, fund fiduciaries have realized the business cycles, credit cycles, market bles and acknowledge the limitations of the limitations of past practices and the need to cycles, and yes, even cycles of market bub human mind. They realized that sometimes change their approaches to investments by bles (investor optimism becomes euphoria, they needed to be protected from them taking remedial action. Very little is straight followed by disillusionment, ending in selves. A renaissance in thought process forward in the world of economics because it panicked losses). Economics fundamen took hold regarding risk management and is often governed by emotion. Attempts to tally underlie market movements, but mar behavioral finance finally came of age. In make the profession more of a science than kets can be easily overwhelmed by fear and addition, many recognized that being more an art have floundered on the rocks of a con greed. We quickly understood that market forward-looking than historically focused stantly changing world that undermines eco risk was not stable over time and that in our investment approach was far more nomic models and makes forecasting hazard investors’ risk tolerances were subject to beneficial. Past deficiencies in risk manage ous. Many mega funds have adopted better, dramatic change, which exacerbated the ment and distorted incentive systems more prudent, risk-management and gover predicament. So trying to solve the risk clearly pointed to poor board oversight in nance processes and started to consider the riddle with a simple, two-dimensional the prior periods. Regulators entered the impact of human behavior on investment (mean-variance) optimization tool fray and saw risk policy as the primary duty decision making. This requires a new designed for normal markets wouldn’t of the board in any organization. The dom approach to risk management and gover work (see appendix 1). Risk-return inant theme in the literature, however, is nance. We’re not talking about structural tradeoffs were needed, along with an eval that good risk-management policies and tweaks. We are talking about the hard work uation of the multi-dimensionality of risk, effective fund governance are intertwined of building a better risk-management frame which required better tools and insights. and risk is a multi-dimensional process work and collaborative organizational culture From a macro perspective, Stultz (2009) requiring various diagnostics, both quanti to overcome cognitive bias. This is why we summed up the problem nicely, outlining tative and qualitative. Institutional inves are seeing a total transformation in our six ways that risks are mismanaged: tors finally understood that some risks are industry with a comprehensive approach to quantifiable but that uncertainty is not. risk management. The mega funds are com • Relying on historical data Models can help to manage quantifiable mitted to this risk-managed approach, with • Focusing on narrow risks risk, but uncertainty must be managed often upwards of 20 specialists devoted to • Overlooking knowable risks some other way. Most texts on investment risk management alone (Beath and • Overlooking concealed risks theory assume market odds are known, like MacIntosh 2013). But how will smaller • Failing to communicate those at the roulette wheel or other games funds, which lack scale and resources and • Not managing in real time of chance. But in reality, market odds are perhaps even the will to change, make that never known and are even constantly shift successful transformation? In short, behavioral impediments had ing as market cycles evolve. Good gover clouded investors’ judgment. Only a few nance is one of the few tools we have to Cognitive Bias Defined mega funds escaped the carnage by recog better manage uncertainty (both our own Psychologist and writer Kendra Cherry nizing the possibility for extreme risks, and the markets’). Early quantitative invest defines cognitive bias as the following (see lengthening bond duration and/or ment theories are useful for a primitive http://psychology.about.com/od/cindex/fl/ increasing their fixed income holdings understanding of investments, but new the What-Is-a-Cognitive-Bias.htm): to match their liabilities, and making ories such as Andrew Lo’s adaptive markets corresponding improvements to gover hypothesis, seismic risk analogies (i.e., with [W]hen we are making judgments and nance processes. each successive bubble the financial system decisions about the world around us, we

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like to think that we are objective, logical, recency effect, caused us to invest more than in realistically appraising various and capable of taking in and evaluating heavily in hedge funds than we should courses of action. all the information that is available to us. have given their lack of transparency and The reality is, however, that our judg- our limited understanding of the risks. Group overconfidence. Confirmation bias ments and decisions are often riddled We also unconsciously mimic others or put and shared-information bias, which are with errors and influenced by a wide too much trust in whatever is familiar to byproducts of overconfidence, ensure that variety of biases. The human brain is us, all of which leads to herding and home the group does not leverage its full investi both remarkable and powerful, but cer- bias. We overestimate the power we wield gative resources, which can lead to ineffec tainly subject to limitations. One type of over our own circumstances, an illusion of tive decision making. fundamental limitation on human think- control that makes us complacent and ing is known as a cognitive bias. results in too little planning. With hind Committee composition. Groups that are sight bias, we convince ourselves that we too large have degraded performance A cognitive bias is a type of error in foresaw what was going to happen when because of poor coordination or motiva thinking that occurs when people are we had no idea what the future would hold. tional issues. processing and interpreting information As a result, we tend to fool ourselves into in the world around them. Cognitive Group polarization. Divisions in biases are often a result of our the group may, for example, lead a attempt to simplify information committee to make riskier decisions processing. They are rules-of-thumb All too frequently we than individuals within the group that help us make sense of the world forget“ that investors are not would have made on their own. and reach decisions with relative always rational, and that human speed. Unfortunately, these biases The Realities of Our Investing sometimes trip us up, leading to behavior can impede investment Brains poor decisions and bad judgments. decision making. Zweig (2007) sheds additional light on why smart people make foolish Insufficient Attention to ” and imprudent financial decisions Behavioral Issues believing that we or others can make accu by pointing out that the investing brain is Richard Thaler, professor of behavioral sci rate predictions in a chaotic market. Above far from the consistent, efficient, and logi ence and economics at THe University of all, we have a terrible time admitting that cal device we like to pretend it is. Even Chicago, astutely remarked that “one of the we don’t know something; it lowers our though the brain functions superbly for most important insights from behavioral self-esteem. (I can sense readers thinking, most purposes in daily life, it can lead us research is that we need to distinguish “Now that may be true elsewhere, but it astray when confronted with the challenge between ‘normative’ theories that tell us certainly doesn’t occur in our investment of choices within financial markets. how rational agents ‘should’ behave and committee meetings.” I believe that’s called Humans can easily detect and interpret ‘descriptive’ theories that tell us what real denial.) To err is indeed human. It’s really simple patterns, a skill that helped our people do” (Mitchell 2006). In short, theory whether, and what, we learn from mistakes ancestors survive and aids us in meeting and practice often differ. All too frequently that counts. the stresses of daily life. But when invest we forget that investors are not always ing, our incorrigible search for patterns rational, and that human behavior can Group Dynamics leads us to assume that order exists when impede investment decision making. In discharging their duties, investment often it doesn’t. We believe we’re smart committees are prone to the same emotions enough to forecast the future, even when Individual Behavior and decision-making biases as individuals. we have been told explicitly that the future One of the most fundamental characteris The investment firm Vanguard documented is unpredictable. This is because our invest tics of human nature is to think we are bet this extremely well in Mottola and Utkus ing brains search for patterns when con ter than we really are. We make level- (2009). Vanguard acknowledged that fronted with random data; leap to conclu headed estimates of other people’s odds of groups have larger collective memories and sions, with two in a row of almost anything success, but we typically overestimate our more available information, but it also con making us expect a third; and seek short own chances of success in a tendency called ceded that group biases and behavioral cuts via instinctive “solutions” even when optimistic bias. For example, our positive hurdles can quickly derail these advantages. we think we are engaged in sophisticated view of investment vehicles such as hedge The four greatest hurdles identified were analysis. funds in 2002 may have been colored by the following: their encouraging performance during the This type of processing is unconscious, tech wreck relative to the rest of the stock Groupthink. Members of a cohesive group automatic, and largely uncontrollable; you market. Optimistic bias, combined with the are more interested in avoiding conflict can’t turn it off or make it go away. For

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example, many investment funds have Figure 1: An Effective Board Governance Framework determined their asset mixes on the basis of desired return and a belief in low correla The Chair and the CIO play a vital role in effective fund governance by developing a culture tion, without properly testing their assump of collaboration through rigorous self assessment tions—an unfortunate shortcut. As Jacobs GOVERNANCE STRUCTURE (2009, 2) notes, “At best, logic is just a way • Unambiguous accountability to justify conclusions we have already • Focus on what matters reached unconsciously.” • Primary Objective • Risk management • Strategy Broadly speaking, institutional investors • Delegation to professionals have underestimated the significance of FFECTI D E VE R NE behavioral issues—to their detriment. A S O S B Rebonato (2007, 235) captured this point Resources beautifully when he wrote the following: BOARD/COMMITTEE A GOVERNANCE PROCESS Common MEMBERSHIP Vision Timely • Proper business plan There is a well-established science that Research Decisions • Agendas and documentation teaches us how to extract the best infor- • Tenure/Recruitment/Orientation Beliefs • Behavior • Investment education and mation from the data. It is called statis- • Expertise innovation • Oversight tics, and its use in risk management is • Experience • Training/Development/Appraisal • Prioritize by importance well-known. There is, however, another science that deals with how actual human beings reach financial decisions Source: Leblanc and Gillies (2005) once the data have been gathered. It is a branch of experimental psychology, and it For institutional investors, risk manage ment: governance structure, governance is also well-established. Unfortunately, its ment is therefore the key and better gover process, and board/committee membership. use in risk management is nowhere near nance is the control. Good governance is all as widespread as that of statistics. about better preparedness, discipline, Under each of these topics, the model stakeholder communication, and a prudent itemizes possible areas for improvement, Let’s face it. Humans can make some pretty fiduciary process. as described below with respect to import bewildering choices. Despite our best ant behavioral biases and other consider intentions to be wise, rational, and discern How Smaller Investment Funds Can ations that tend to be common among ing, we are subject to overconfidence, Overcome Cognitive Bias smaller funds. regret, outright fear, and many other behav There is no single solution to overcoming ioral issues (see appendix 2). behavioral bias in a complex market, but Common Vision there are many ways to remove some of the The chief investment officer (CIO) and Investment fiduciaries may never be able to emotion from institutional investing. chair determine where the fund is today completely control their human nature and Figure 1 illustrates Richard Leblanc’s and where they wish to take it in future. maybe they shouldn’t try. They will make “Proposed Board Effectiveness Model,” Leadership comes from the chair, who with mistakes in a complex, adaptive system like which I find is a helpful framework for the CIO must cultivate the fund’s common the market. But they can identify situations improving investment decision making, vision, and together they must mentor where the dangers of cognitive bias and and I suggest that it may help smaller committee members to clearly articulate false perspectives are greatest and mitigate funds to mitigate behavioral bias and be and realize that goal (focusing effect). As an their human (mis)behavior by taking the more successful. Below I apply Leblanc’s institutional consultant, I regularly see busy following steps: model to investing, noting the cognitive agendas disrupted by well-meaning mem errors it may overcome (in parentheses bers who early in the meeting ask, “Why 1. Recognizing who they are, behavioral and italics). haven’t we fired that manager who has biases and all. underperformed by X percent for the past 2. Controlling the environment within LeBlanc’s model begins at the center of four years (regret)?” A poor chair, surprised which they have a propensity to display figure 1 with the three elements necessary by the question, will then allow the meeting such behavior. to achieve common vision: resources, to spiral out of control and a decision will 3. Establishing frameworks within which research/beliefs, and timely decisions. be made on firing the manager without to apply their judgments so that they proper research and facts. A skilled chair make different decisions or at least fully The model expands from there by defining will quickly get the meeting agenda back on inform themselves of the consequences. the three major areas for further improve track by retorting: “That’s an interesting

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question but we already have a full and very 80/20 rule to simplify their approach and trustees’ role is one of oversight, but they busy agenda today. Let’s assign that task to concentrate on those issues that matter must be decisive and prepared to act when the staff and consultant to review and most—defining the key fund objective, action is required (hard-easy effect). For report back to us at the next meeting on understanding the risks, setting risk parame smaller funds with limited staff, which may their findings” (well-traveled road effect). ters, establishing strategic direction, deter become insular in their views (illusion of Yet the chair is often chosen haphazardly mining the asset allocation, etc. control), obtaining insight on industry instead of based on skill. trends from a third party such as a consul Governance Structure tant may be helpful. An annual business Resources, Research/Beliefs, and For governance to be an explicit rational plan review allows sufficient time for set Timely Decisions focus all stakeholders must be unambigu ting strategic direction and risk definition/ Smaller investment funds have a competitive ously accountable and have clear under management, as well as education and disadvantage in terms of resources (staff and standing about the primary goal. But most innovation (anchoring). Everything on the tools), proprietary research, and agenda should have a clear purpose risk-management practices, due to and be logically ordered, with time diseconomies of scale (restraint bias). allotted by importance (attentional However, investing is a search for Larger returns can be achieved bias). Well-constructed investment returns, paid for through operating by“ resisting emotion and being more policies and practices, supported by costs and the assumption of risks; strong research (belief bias) and costs are more predictable than risks, counterintuitive, by investing more documented reasons for investing, and risks are more predictable than heavily in bear markets, and by being are the best way to prevent being returns. Stock market returns will more conservative in the euphoric sidetracked by our emotions. always shock and surprise us (opti- Minutes should abide by the four mism bias). Smaller funds, however, stages of bull markets. C’s by being correct, concise, clear, have the ability to be more nimble ” and consistent (hindsight bias). Out than their larger counterparts with standing action items should be out tipping their hand to the market. With funds have multiple competing goals, such noted along with the individuals responsi fewer assets under management to transi as assets greater than liabilities, beating the ble for completion with specific due dates tion, they can make timely decisions. Larger policy benchmark, and above-median noted. Finally, when making major strate returns can be achieved by resisting emotion performance (selective attention bias). The gic decisions, ensure the right questions and being more counterintuitive, by invest board and investment committee must have been asked before proceeding (herding more heavily in bear markets, and by determine the ultimate objective (meeting ing), such as the following: being more conservative in the euphoric liabilities), how success will be measured, stages of bull markets (overcoming fear and and the alignment of incentives. As part- • Does it make sense for this fund? greed). That said, smaller funds must have time members of a smaller organization, • Has the downside been adequately eval governance structures that correspond to the they must recognize time limitations, the uated relative to the upside? dynamic investment strategies adopted as need to delegate extensively to staff and ser • Are there skewed incentives or agency well as effective implementation to be suc vice providers, and the need to track prog issues? cessful. Often without adequate staff and ress to the primary goal. Overly detailed • What else needs to be known and meeting only infrequently (generally quar reports (status quo bias), instead of crisp considered? terly), they must fathom better ways to meet executive summaries that focus on aggregate their primary objective. An outsourced CIO portfolio results and high-quality insight, Board/Committee Membership model (partnering with sophisticated inves lead to (blind spots). All too often trustees A logical framework will evaluate each and tors who can provide the costly risk-man underestimate the resources required for every issue (recruitment, tenure, develop agement tools, research, and staff to imple successful strategic analysis and cost-effec ment, self-evaluation, etc.) to determine ment on their behalf) or keeping it simple to tive implementation (overconfidence). A log whether the board and investment commit focus on the big levers (such as using risk ical framework will evaluate each and every tee have the requisite skills, education, and analysis and asset mix along with passive issue based on the skills required and deter experience. Developing a risk-adjusted cul investing to reduce complexity, decrease mine whether those skills are on hand or ture where direct, serious, and important costs, and implement expeditiously), are need to be acquired. questions are asked and plainly answered is a ways for smaller funds to think outside the good way to ensure trust between staff and box and narrow the scale gap. (The latter Governance Process members. Two areas where smaller funds approach, however, may require reduced In a probabilistic environment, focusing on often fall short are a lack of diversity in mem return assumptions.) In these two suggested a better decision-making process is health bership and limited practical knowledge of solutions, governing fiduciaries are using the ier than dwelling on a bad outcome. The the latest investment ideas (status quo bias).

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Many corporate plans are stacked with exec Committees. Vanguard Investment Counseling & 6. Liquidity risk may not be apparent or Research, 2009. https://institutional.vanguard.com utives from the same firm, whose collective (accessed Dec. 15, 2009). factored into the model. knowledge of investments may be somewhat Rebonato, Riccardo. 2007. Plight of the Fortune Tellers. 7. Historical factor models may not fore Princeton, NJ: Princeton University Press. limited (groupthink). Adding outsiders who Stultz, Rene M. 2009. Six Ways to Mismanage Risk. cast future behavior. sit on larger, more-experienced funds and Harvard Business Review 87, no. 3 (March): 86–94. 8. Models don’t address implementation Zweig, Jason. 2007. Your Money and Your Brain: How the play the role of devil’s advocate can be New Science of Neuroeconomics Can Help Make You issues such as resources, skill, and costs. extremely helpful in advancing the commit Rich. New York: Simon & Schuster. Important Information tee’s thought process and providing differing Appendix 1: Problems with Over- views. Feedback is essential. Maintaining a Nothing in this publication is intended to constitute legal, tax Emphasizing Quantitative Tools securities, or investment advice, nor an opinion regarding log of strategic past decisions and revisiting Risk models used inappropriately may lead the appropriateness of any investment, nor a solicitation of the effectiveness of those decisions a year or to a false sense of security, requiring model any type. This is a publication of Russell Investments Canada two later is a great way to understand what users to apply a healthy sense of skepticism Limited and has been prepared solely for information purposes. It is made available on an “as is” basis. Russell Investments worked or didn’t work, why, and if improve to any and all models. Risk models are ments are necessary (reference framing). A Canada Limited does not make any warranty or representation crude approximations of the real world regarding the information. well-functioning board is imperative to keep because of the following: Russell Investments and the Russell Investments logo are pace with the numerous and significant registered trademarks of Frank Russell Company, used under changes occurring in the investment industry. 1. Returns are not independent. license by Russell Investments Canada Limited. 2. Distributions are not normal. Russell Investments Canada Limited is a wholly owned Conclusion 3. Correlations are time-varying and subsidiary of Frank Russell Company and was established in The global financial crisis exposed many unreliable in extremes. 1985. Russell Investments Canada Limited and its affiliates, including Frank Russell Company, are collectively known as deficiencies in investment literature and fund 4. The ualityq of inputs is often suspect Russell Investments. governance practices. Making investment because of, e.g., data quality, relevance, decisions in turbulent economic times is no Copyright © Russell Investments Canada Limited 2014. All and historical length. rights reserved. This material is proprietary and may not be easy process. It requires vigilance, objectivity, 5. Optimizers are highly sensitive to the reproduced, transferred, or distributed in any form without prior and a culture of risk-adjusted decision mak assumptions (model risk). written permission from Russell. ing that many better-managed mega funds have readily adopted. Smaller funds, which Appendix 2: A List of Some Behavioral Issues lack the economies of scale, need to be more deliberate in thinking about what may work Post-purchase rationalization Observation selection bias Illusion of control best. They must think outside the box and Time-saving bias Illusory correlation Conservatism bias establish frameworks to help ensure access to Optimism bias Backfire effect Negativity bias critical information and diverse perspectives Social comparison bias Recency illusion Normalcy bias Risk compensation Belief bias Base rate fallacy to facilitate balanced thinking and overcome Hard-easy effect Social desirability bias Mere exposure effect cognitive bias. Attentional bias Outcome bias Zero-sum heuristic Ambiguity effect Information bias Availability cascade Bruce B. Curwood, CIMA®, CFA®, is director, Congruence bias Irrational escalation Less-is-better effect investment strategy for Russell Investments Hindsight bias Unit bias Confirmation bias Clustering illusion Decoy effect Money illusion Canada. He earned a BComm in economics Rhyme as reas on effect Denomination effect Status quo bias from the University of Toronto and an MBA Moral credential effect Pro-innovation bias Frequency illusion from York University. He is a member of IKEA effect Experimenter's bias Neglect of probability Overconfidence effect Negativity effect Distinction bias IMCA’s Board of Directors. Contact him at Forer effect Focusing effect Pessimism bias [email protected]. Contrast effect Restraint bias Semmelweis reflex Bias blind spot Just-world hypothesis Illusion of validity References Sub-additivity effect Availability heuristic Stereotyping Beath, Alex, and Jody MacIntosh. 2013. Risk- Endowment effect Conjunction fallyac Omission bias Management Practices at Large Pension Plans. Rotman International Journal of Pension Management Anchoring Empathy gap Duration neglect 6, no. 1(spring): 38–44. Impact bias Identifiable victim effect Functional fixedness Jacobs, Charles. 2009. Management Rewired: Why Hostile media effect Gambler's fallacy Exaggerated expectation Feedback Doesn’t Work and Other Surprising Lessons Selective perception Observer-expectancy effect Reactance from the Latest Brain Science. New York: Portfolio Essentialism Well travelled road effect Framing effect (The Penguin Group). Ostrich effect Hot-hand fallacy Survivorship bias Leblanc, Richard, and James Gillies. 2005. Inside the Boardroom: How Boards Really Work and the Coming Reactive devaluation Pseudocertainty effect Subjective validation Revolution in Corporate Governance. Mississauga, Hyperbolic discounting Curse of knowledge Zero-risk bias ON: John Wiley & Sons Canada, Ltd: 139. Choice-supportive bias Insensitivity to sample size Pareidolia Mitchell, Roger. 2006. Risk: The Final Frontier. CFA Bandwagon effect Loss aversion Planning fallacy Magazine (March–April). http://www.cfapubs.org. Mottola, Gary R., and Stephen P. Utkus. 2009. Group Source: Wikipedia, as adapted http://creativecommons.org/licenses/by-sa/3.0/ Decision-Making: Implications for Investment

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