My current academic research currently focuses on personal characteristics of investors (specifically hedge fund managers) and how these characteristics affect their investments. For example, my paper on hedge fund managers’ marriages and divorecs shows that fund performance suffers during both marriages and divorces and argues this is a results of manager distraction from personal events. Another paper on hedge fund managers’ cars shows that fund managers who drive performance cars take more risks, without yielding additional returns.
This general agenda has led me to the firm belief that investors are swayed by behavioral biases in their investments. These biases can be the result of some intrinsic characteristic (such as a desire for sensation seeking, which leads to a preference for fast cars and risk in investments) or some time varying affect (such as a distraction from a major life event). Either way, these biases are hazardous to investment performance.
Quantitative investing gives an easy out to these biases. If we follow a fixed set of rules when investing (and are faithful in following them), there’s no room for behavioral biases to creep in. A computer, relying on objective data from the markets, tells us what to buy and sell when. Getting married? No problem – just let the computer tell you what to do. Getting divorced? Same deal. Inherently a risk taker? There’s no scope for your gambling ways to affect your investing. Risk averse to the extreme? Again… no way for your timidity to stymie your investing.
This is one of the big advantages of quantitative investing.