Do behavioral biases in investing lead to higher risk?

U.S. economist Terrance Odean, a renowned expert in behavioral finance, visited Austria at the invitation of WU and Spängler IQAM Invest.

Risk management is a hot topic, more important today than ever before. This leads to the question of whether the behavioral biases of investors may lead to higher risks. The second Spängler IQAM Invest Round Table event, organized by WU’s Institute for Finance, Banking and Insurance on January 17, 2013, focused on this topic. Terrance Odean, a renowned US economist and well-known advocate of behavioral finance, gave a presentation entitled “Do Behavioral Biases Lead to Unrecognized Risk-Taking?” Mr. Odean, who teaches at the University of California, Berkeley, is regarded as one of the leading experts in the field of behavioral finance.

The market isn’t always right – Emotions play an important role

One of the key tenets of behavioral finance is that investor behavior is not always rational. Based on a research approach rooted in behavioral science, behavioral finance sets out to investigate systematic patterns of human behavior when it comes to making investment decisions, including the psychological motivations that underlie these decisions. “Risk management tends to look only at external factors such as the current market environment and market volatility. However, the decisions we make often create risks that we cannot recognize and assess beforehand,” says Terrance Odean. “Exaggerated self-confidence leads people to underestimate risks. Emotional states have an effect on our willingness to take risks. Conventional risk management models and tools are important, but they may let some risks go unnoticed because they fail to factor in psychological aspects,” Mr. Odean explains.

A more structured approach is needed to eliminate mistakes

“Many investors, even institutional investors, tend to be guided by behavioral biases when it comes to asset allocation. Behavioral finance research shows, however, that a more structured approach is needed in order minimize or eliminate systematic mistakes inherent in human behavior patterns. Asset and risk management must go hand in hand and must be attuned to each other,” adds Josef Zechner, professor at WU and member of Spängler IQAM Invest’s scientific management team, who moderated the round table discussion.

About Terrance Odean

Terrance Odean has been Rudd Family Foundation Professor of Finance at the Haas School of Business at the University of California, Berkeley, since 2008. He has worked in different capacities at the University of California, Berkeley since 2001, including the position of Willis H. Booth Professor of Banking and Finance. Previously, he served as assistant professor at the Graduate School of Management at the University of California, Davis. Terry Odean has received numerous awards and honors during his career, including the Graham and Dodd Award of Excellence. He is a member of several advisory boards and an associate editor of the Journal of Behavioral Finance.

Bringing together academic financial research and asset management practice

The Vienna Seminar on Asset Management takes place on an annual basis, and it is complemented by a series of Round Table events held throughout the year. The purpose of these Round Table talks is to bring together academic financial research and asset management practice. The events are designed to harness the collective expertise of the researchers that form part of the international network of experts built up by the Scientific Management of Spängler IQAM Invest.

Contact:
Dorothea Grimm
Department Manager
Tel: +43 1 31336/4244
dorothea.grimm@wu.ac.at
http://www.wu.ac.at/finance/coop/vsam