Effects of Behavioral Factors on Investment Committee Decision-making

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

Shop CFA® Exam Prep

Offered by AnalystPrep

Featured Shop FRM® Exam Prep Learn with Us

    Subscribe to our newsletter and keep up with the latest and greatest tips for success
    Shop Actuarial Exams Prep Shop Graduate Admission Exam Prep


    Daniel Glyn
    Daniel Glyn
    2021-03-24
    I have finished my FRM1 thanks to AnalystPrep. And now using AnalystPrep for my FRM2 preparation. Professor Forjan is brilliant. He gives such good explanations and analogies. And more than anything makes learning fun. A big thank you to Analystprep and Professor Forjan. 5 stars all the way!
    michael walshe
    michael walshe
    2021-03-18
    Professor James' videos are excellent for understanding the underlying theories behind financial engineering / financial analysis. The AnalystPrep videos were better than any of the others that I searched through on YouTube for providing a clear explanation of some concepts, such as Portfolio theory, CAPM, and Arbitrage Pricing theory. Watching these cleared up many of the unclarities I had in my head. Highly recommended.
    Nyka Smith
    Nyka Smith
    2021-02-18
    Every concept is very well explained by Nilay Arun. kudos to you man!
    Badr Moubile
    Badr Moubile
    2021-02-13
    Very helpfull!
    Agustin Olcese
    Agustin Olcese
    2021-01-27
    Excellent explantions, very clear!
    Jaak Jay
    Jaak Jay
    2021-01-14
    Awesome content, kudos to Prof.James Frojan
    sindhushree reddy
    sindhushree reddy
    2021-01-07
    Crisp and short ppt of Frm chapters and great explanation with examples.