Swiss Finance Insight January 2014 Behavioral finance for wealth management SFI NEWS Interview with Dr. Matthias Uhl, Analyst, Lunch & Learn @ SFI Global Investment Office, UBS Wealth Management Starting in February, the Swiss Finance Institute will be holding several infor- mation sessions where participants can gather information about its education offerings. The first session will take place at SFI’s Zurich offices on February 24 from noon to 2 p.m. A small lunch will also be provided. http://www.sfi.ch/events New Faculty Appointment at HEC Lausanne Artem Neklyudov has been appointed Professor of Finance at HEC Lausanne. In which areas does UBS apply training. Our internal edu- in 1979. The theory simply He joined the SFI faculty at University of behavioral finance? cational institution, the UBS states that losses hurt more Lausanne in August 2013, after obtain- Within UBS Wealth Business University, has two than gains give joy, which at ing his PhD in finance from Tepper Management (WM), there programs: the WM Diploma that time was a revolutionary Business School at Carnegie Mellon are two main areas where and the WM Master. We theory, since it went against University. His main research interests behavioral finance principles teach in both programs the the many theories stating lie in securitization trading and mar- are applied. The first is in the basic principles of behavio- that investors were rational. ket microstructure. Prof. Neklyudov’s investment process for the ral finance in private bank- These findings are still a very PhD thesis was awarded the Alexander WM business. The investment ing, such as Prospect Theory important cornerstone of our Henderson Award for Excellence in process that leads to the UBS and several investor biases. classes at the UBS Business Economic Theory. House View is created by the This is meant to enable client University. For the quanti- http://www.sfi.ch/Neklyudov Global Investment Office, advisors to understand and tative models we use, more headed by the Global Chief advise our clients even bet- recent work is important. A Investment Officer (CIO) ter, while trying to go beyond great piece that was helpful for SFI on Facebook Alexander Friedman. The the asset and income state- our news sentiment model is On December 20, the Swiss Finance UBS House View gives our the one by Prof. Paul Tetlock Institute launched its Facebook page as investors guidance on both from Columbia University part of its goal to encourage an enriching the strategic asset allocation entitled “Giving Content to dialog between Swiss finance academics and practitioners. Check out Facebook. (SAA) - the long-term view “One should Investor Sentiment: The Role on how to allocate between of Media in the Stock Market.” com/SwissFinanceInstituteSFI for regu- asset classes - and the tacti- constantly look for It was published in 2007 in the lar updates about upcoming events and cal asset allocation (TAA), ways to improve the Journal of Finance. the latest findings by SFI researchers at which attempts to anticipate leading Swiss universities. short-term (6-month) market models and make Are there any open research https://www.facebook.com/SwissFinanceInstituteSFI moves. For the TAA, we have them more efficient.” questions in behavioral two pillars of input: quan- finance you would like to see titative and qualitative. The MAttHIAS UHL addressed? quantitative part looks at data At UBS’s WM division, the Upcoming Events and is interpreted by mod- areas of behavioral finance els. In the qualitative part, research we work on are well we analyze market events ment of a client by consider- covered. However, one can February 24, 2014 – Zurich that are not captured by our ing also the client’s emotions. and should constantly look Lunch & Learn @ SFI. models, such as extraordi- We work closely together with for ways to improve the mod- Participants will be given an overview nary central bank action or Thorsten Hens, SFI Professor els and make them more effi- of SFI’s executive education programs. political issues. In the quan- at the University of Zurich cient. The most exploited and titative part, we have three who regularly gives lectures at researched data is probably distinct models that make use the UBS Business University. the sentiment survey data for March 25, 2014 – Zurich of behavioral finance princi- our business cycle model, as Evening seminar with Boris Collardi, ples. First, we use sentiment What have been, in your opin- well as the price momentum CEO of Julius Baer. The talk is part of survey data to capture devel- ion, the biggest achievements model, because the data are SFI’s Swiss Banking Transformation opments in the real business in behavioral finance research widely accessible. In terms of Testimonials series. cycle. Second, we measure so far and how did these help news sentiment, since this is price momentum. And third, to improve wealth manage- the newest stream of research, we consider sentiment in ment at UBS? there is probably much larger June 3, 2014 – Zurich newspaper articles. One of the biggest achieve- room for improvement by Breakfast seminar with Martin Scholl, ments that established behav- looking at various types of CEO of Zürcher Kantonalbank. The The second area where UBS ioral finance is the Prospect data and models. talk is part of SFI’s Swiss Banking WM deals with behavioral Theory by Daniel Kahneman MP Transformation Testimonials series. finance is in its employee and Amos Tversky, published page 1 / 2 Swiss Finance Insight January 2014 Value Around the World Deciphering the value premium “Our study shows that culture not only influences how people speak, what they eat, how they dress… but also matters for stock market returns.” tHORStEN HENS Excess returns of value over behavior caused by cognitive “When we started this endeav- One could ask whether the growth stocks have been puz- and emotional factors leading or, many colleagues predicted relationship between the cul- zling researchers since the early to pricing errors, which are that the effort wouldn’t be tural factors and value returns nineties. New SFI research responsible for asset pricing worth undertaking,” says Prof. does not rather stem from a shows that differences in these anomalies in general and for Hens. “They contended that country’s economic develop- returns can be explained by value premia in particular. most investors are rational and ment or other economic varia- differences in individual time that cultural differences should bles. The study addresses these and risk preferences across Recently, new insight has been not matter for stock returns.” questions extensively. However, countries. added to the second stream the link between patience and of literature by SFI Professor To measure cultural differences value returns is confirmed even Since the early nineties, finance Thorsten Hens and SFI PhD in connection with stock returns, after taking into account eco- researchers have been looking student Nilufer Caliskan (both Hens and Caliskan look at two nomic differences across the into a recurring asset pricing at the University of Zurich), dimensions: patience and risk countries considered by Hens anomaly known as the value who conducted the largest aversion. Patience is measured and Caliskan. premium. The value premium international study on portfo- as the percentage of partici- is defined as the excess return lio returns based on book-to- pants willing to wait for a higher As Prof. Hens points out, “this that portfolios of stocks with market ratios. Theirs is also the return. Risk aversion is measured study shows that culture not high book-to-market values largest international study on as the average compensation par- only influences how people (value portfolios) have over cultural differences in financial ticipants require for a given loss. speak, what they eat, how they portfolios with low book-to- behavior. This allowed them For the latter, behavioral finance dress… but also matters for market values (growth portfoli- for the first time in history to also uses the term “loss aversion.” stock market returns. Actually, os). This excess return appears examine how cultural differ- culture matters more than eco- to be consistently larger than ences affect the magnitude of The findings of the study reveal nomic differences!” what can be explained by tradi- value returns. that risk aversion is positively MP tional asset pricing models. related to the magnitude of value profits: the higher the Finance academics and practi- compensation investors want tioners alike have been investi- for a given loss, the higher the gating the value anomaly in dif- Key Concepts value profits. Patience, on the Links ferent stock markets. Possible other hand, has a negative link • “Value Around the World”, Value premium: to value profits: profits increase explanations of the excess by N. Caliskan and T. Hens: return of value strategies focus Excess return that stocks with with a country’s impatience. http://ssrn.com/abstract=2274823 on two different aspects. high book-to-market values (value stocks) have over This result gives scientific evi- stocks with low book-to-mar- • Prof. thorsten Hens: On the one side, there is the dence to the frequently held www.sfi.ch/Hens “hidden risk explanation” given ket values (growth stocks). claim by practitioners that value by traditional finance. This lit- Patience: stocks provide ‘short-term pain erature tries to find increasing- Percentage of survey but long-term gain’. Impressum ly sophisticated risk factors that participants willing to wait can justify the excess returns of for a higher return. Consequently, impatient and SwISS FINaNCE INSIgHT value stocks over growth. risk averse investors prefer not is published online by the Risk aversion: to hold value stocks. In coun- Swiss Finance Institute, On the other side, there is a average compensation that tries with these types of inves- Bd.