On October 9th, Richard H. Thaler, one of the founders of behavioral economics and behavioral finance, was awarded the 2017 Nobel Prize in Economics for shedding light on how irrational decision making affects the economy and financial markets.
Since 2001, Degroof Petercam AM - the institutional asset management division of Degroof Petercam - has been capitalizing on Thaler’s academic research. The first ‘Behavioral Value’ fund was launched in 2002. Currently, Degroof Petercam AM’s Behavioral Value Strategies account for €2.5bn in assets under management.
Degroof Petercam AM‘s Behavioral Value approach is to a large extent based upon a paper in the Journal or Finance, “Does the Stock Market Overreact?” By Werner F. M. De Bondt and Richard Thaler (1985). According to their empirical observations, markets tend to excessively extrapolate both good and bad news, leading to the overpricing of glamour stocks and the underpricing of stocks fallen out of favour. When “mean reverting" eventually kicks in, glamour stocks underperform and fallen angels outperform. Early 2000, Jan Longeval – co-CEO of the Institutional Asset Management division and Philippe Denef – CIO Quantitative Equity, argued that capitalizing on these theories could result in innovative and outperforming investment strategies. The challenge was to convert academic behavioral insights into a clear-cut investment process.
Jan Longeval: "Behavioral finance demonstrates that many market participants tend to make systematic mistakes. Our goal became to exploit these mistakes to our advantage through a consistent investment process, which has basically remained stable in these 15 years, as such creating significant added value for our investors. ”
Richard H. Thaler - some background
Up until the 1970s, economic thinking was primarily driven by mathematicians. They primarily had a normative view on the world and tried to model the economy as it should be. Typically, it entailed that their economic theories were subject to a set of starting assumptions. The tenet was that economic actors in general and investors in particular think and behave in a rational manner, always aiming for the objective optimum.
As of the late 1970s, this view shifted. A number of behavioral psychologists started to approach economic theory differently: not from a normative approach, but based on observations of human behaviour. They observed that most investors are unable to comply with the principle of perfectly rational decision-taking. Two examples are pertinent in this regard:
1) irrational behaviour results from the fact that when taking decisions, people tend to take mental shortcuts, i.e. when confronted with complexity, they tend to fall back upon rules of thumb, of which many are either incorrect or incomplete;
2) framing: not only the objective content of information determines decision-taking, but also the way it is being presented.
Jurgen Vluijmans – Communication Manager Degroof Petercam AM – Tel +32 2 287 93 28 – [email protected]
About Degroof Petercam AM
Degroof Petercam AM is a leading and independent Brussels based asset management firm with a long-standing reputation. It is wholly owned by the independent and renowned Degroof Petercam Group, whose history dates back to 1871. Degroof Petercam AM manages funds and mandates on behalf of institutional end investors across Europe, and offers its expertise through a network of over 400 distribution partners.
Degroof Petercam AM is exclusively dedicated to long-only asset management and specialised solutions. Domains of expertise include European assets, small and mid-cap equities, behavioural finance, global fixed income and Responsible Investment. It caters to the needs of corporate and public pension funds, insurance companies, not-for profit organisations and private banks. The entity currently manages over €37bn and employs close to 140 professionals.