I.H. ASPER SCHOOL OF BUSINESS
O nce the Rodney Dangerfield of its field, behavioural economics is getting a lot more respect these days. University of Manitoba I.H. Asper School of Business assistant professor Chi Liao says the fact that the pioneer of behavioural economics, Richard H. Thaler, won the 2017 Nobel Prize for Economics lends even more legitimacy to a relatively new field that is gaining acceptance. Liao started teaching a Behavioural Finance class in the fall of 2015, in preparation for the launch this September of the Asper School’s new Master of Finance (MFin) degree program. The only MFin program available between Toronto and Vancouver, it gives Winnipeg- based students the first opportunity to earn a degree that’s highly valued in finance industry job markets. The program also prepares students to write Chartered Financial Analyst (CFA) exams to earn the globally recognized CFA designation. A component of the CFA exams, Behavioural Finance was new to the Asper School, but Liao has conducted research in the field over the past several years. She says it’s a complement to traditional academic models, focusing on how predictably irrational human behavioural factors affect markets. “Traditional finance assumes that we’re all rational and as a result, markets are rational and efficient,” Liao says. “However, people tend to be irrational in predictable ways. It’s a more realistic picture of how markets and people function the human factor Behavioural Finance and risky business decisions
Photo courtesy of the I.H. Asper School of Business
in reality, as opposed to what theory generally tells us.” For example, traditional models typically posit that everybody should participate in the stock market, but in reality, only about half of Americans (and by extension, Canadians) invest in stocks. “If you’re saving for retirement … you’re leaving a lot of wealth on the table if you don’t participate in the stock market, so the question is why.” Liao has authored or co-authored several working papers, including Risk Taking Begets Risk Taking: Evidence from Casino Openings and Investor Portfolios, which found that people who gamble at new casinos in their communities go on to take more risks in their portfolios. Currently, she’s working on a research paper that examines whether experiences with significant economic hardship in childhood have lasting impact on adult risk- taking behaviour. “What we’re finding generally is that people who experienced financial instability in the household as a child are less likely to participate in the stock market as an adult.”
Those who do participate in the market should be aware of a few common foibles, many of which have been researched by another pioneer, Hersh Shefrin, a U of M graduate who has co-authored papers with Thaler and who wrote the book Beyond Greed and Fear: Understanding Behavioural Finance and the Psychology of Investing. For example, “we tend to sell our winners and hold on to our losers, so if you have a portfolio and you decide to sell your stock, you’re more likely to sell the stock that’s gone up in price since you purchased it,” Liao says. “And you tend to hold on to your losers because you don’t want to realize those losses. The reason that’s bad is that on average the winners you’re selling outperform the losers that you hold onto.” People who are overconfident tend to trade more frequently, and also have the lowest returns, Liao adds. “I would tell investors to hold passively managed low-fee funds, basically buy the entire market and hold on to it,” she says. “If you do want to buy and sell individual stocks and tinker, treat it as a separate fund, don’t do it with your retirement fund.” ■
december 2017
18
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