The Human Factor: How Behavioral Science Can Improve Investment Decisions
PIMCO seeks a competitive edge in its investment process by applying behavioral science insights to advance rational decision-making and risk management.
A wealth of research dating to Descartes in the 1600s shows the value of a sound process that is based not only in data but also human factors. It’s one that requires continuous evolution. For a deeper dive on this topic, please see our Behavioral Insights piece, “The Human Factor: Using Behavioral Science to Improve Investment Decisions.”
Here, we share three sets of practices that other institutions and investors may find useful.
1. Seeking information to challenge and expand our perspective
The first set of practices seeks to connect diverse thinkers, specialists and teams of skilled managers to share ideas and create innovative strategies and portfolios.
- PIMCO's investment process , for instance, is rooted in our Secular and Cyclical Economic Forums. Four times a year, our investment professionals from around the world gather to discuss and debate the state of global markets and economies and identify trends over shorter- and longer-term horizons. This process benefits from input from leading external experts and across a large, diverse pool of internal experts.
- Having a cognitively diverse workforce is essential. It’s important to be conscious and intentional about talent composition, seeking to avoid too much overlap and too little coverage in topics, skills, training, methodology, background, identity, and function. This will help generate more novel, relevant and dynamic ideas.
- A deep bench of talent means more complete information and more precise assumptions. It can lead to higher-quality insights and appreciation for complexity that enables more customized solutions.
2. Structuring teams and environments to maximize the interchange of ideas
The second set of practices focuses on ensuring that ideas are shared and heard among employees and across domains.
- We have a simple goal: Make it easy. To do so, we focus on situational and contextual factors that influence people’s choices. Even the most talented teams will struggle to succeed if conditions are working against them. We try to clear their runway as much as possible.
- To promote a more inclusive and integrated culture, we create opportunities to communicate via events, technology, polls and surveys. It’s also necessary to foster a culture where individuals are comfortable sharing their knowledge. A crucial component is incentivizing accuracy by rewarding teamwork, sharing new evidence and feedback, having a long-term focus, and being motivated to continue learning and growing.
- We use strategically-timed reminders and nudges to better guard against behavioral biases and informational noise. For instance, we are cognizant that the status of leaders can unintentionally silence other team members, so inclusive leaders solicit others’ views first.
3. Systematically testing and updating assumptions to sharpen our senses and precision
The third set of practices aims to overcome human limitations.
- The use of new technology and data, for example, can help overcome limitations such as a lack of time, resources, effort and cognitive capacity. Quantitative, data-informed approaches promote more disciplined and impartial decision-making.
- It’s a dynamic approach that requires challenging and updating one’s assumptions in light of new information. To add discipline to the process, we document the rationale, evidence, and degree of confidence supporting the group’s position.
- These practices are forward-looking. We seek to identify the drivers of performance; learn from and improve processes that are repeated; as well as situate present conditions into broader, long-term economic trends.
Outcomes won’t always play out precisely as predicted. Nonetheless, structured and rational processes are more likely to generate better decisions – and an investment edge.
Download Now: “A Checklist of Behavioral Science Best Practices”
Visit the behavioral science page for more information.
There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market.
PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the opinions of the author and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America LLC in the United States and throughout the world. ©2023, PIMCO.