Effects of Behavioral Factors on Investment Committee Decision-making

Research has shown that making decisions in a group setting does not always yield optimal outcomes. Committees can include but are not limited to the following:

• Research teams.
• Analyst collaborations.
• Board of Trustees.
• Investment clubs.

Issues arise when committees are all composed of like-minded individuals who approach problem-solving with the same mindset and skills. In most cases, group members are hesitant to express dissenting opinions, especially if such opinions are out of sync with the senior team members’ position. Social proof bias occurs when a person blindly conforms to the beliefs of a group. This is also known as groupthink.

Techniques for Mitigating Their Effects

In order to remedy social proof bias and improve group decision-making, teams are encouraged to:

1. Promote diversity.
2. Encourage dissension of opinions.
3. Choose strong team leadership.
4. Foster mutual respect among all members.

Question

Which of the following least accurately describes the inability of a group to generate innovative ideas?

1. Social proof bias.
2. Groupthink.
3. Member diversity.

Solution

The correct answer is C:

Member diversity would engender and encourage the accomodation of new viewpoints. It is only through divergent opinions that all options for solving a problem can be explored.

A and B are incorrect: Social proof bias (Groupthink) occurs when a person follows the group’s beliefs. Additionally, it is evident when people conform to certain decisions/behaviors since they are socially acceptable. This inhibits new and creative ideas.

Reading 2: Behavioral Finance and Investment Processes

Los 2 (f) Discuss how behavioral factors affect investment committee decision-making and recommend techniques for mitigating their effects