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Behavioural Finance

Behavioural Aspects of Institutional Investment Decision-Making

Winning team identified to lead Investigating Institutional Investors Decision-Making research project

After a rigorous selection process, we’re delighted to announce that the IFoA’s Actuarial Research Centre (ARC) has awarded a grant to support a significant behavioural finance research programme; specifically focusing on decision-making by institutional investors.

The selected research team is comprised of researchers from City, University of London, Ipsos, Leeds University Business School, University of East London and Reverence Limited. The team itself includes Professor Peter Ayton, Dr Iain Clacher, Dr Volker Thoma, Colin Strong and David Calfo, who bring expertise from a range of disciplines.

Project summary

The aim of this new project is to explore the decision-making of institutional investors, in particular insurers and pension schemes, and the biases that may affect their investment decisions. This may include, but not be limited to, emotional, psychological and political biases. It is expected that the project will first explore what "rational" or “optimal” behaviour could be expected from an institution in certain economic scenarios, based on its investment objectives and underlying values.

 It will then explore whether there is solid evidence that “behavioural” factors, such as human psychology, company culture, corporate politics and conflicts of interest, cause them to deviate from optimal behaviour. The research will then make practical conclusions that could be used by actuaries working in investment and related areas. For example, one possible output of the research could be a suggested governance structure an organisation could put in place to manage these biases and conflicts.

Background to the project

To date, a substantial volume of work has been undertaken in the field of behavioural finance to explore the psychological factors affecting investment decisions made by individuals.  In contrast, “behavioural” factors (such as politics or human psychology) affecting decisions and actions made by institutional investors, such as insurers or pension schemes, are less understood.  This could be significant for actuaries working in the areas of investment advice, asset-liability matching, liability-driven investments and investment risk management, within institutional investors, such as insurance companies and defined benefit pension schemes.A significant number of actuaries work today as advisors to institutional investors’ key decision-making bodies.  Typical roles could include:

  • Investment advisors to occupational pension schemes
  • Professionals setting the investment strategy for assets of insurance companies
  • Investment strategists for assets backing long-term life insurance liabilities, such as with-profit or annuity funds

Investment objectives and asset allocation decisions for the types of organisations mentioned above would typically be expected to be driven by the long term relationship between the value of assets and the actuarial or accounting value of liabilities. In setting a long term investment strategy, investment actuaries are often required to form judgements and make assumptions (explicit or implicit) based on commonly accepted economic theories.  This usually relies on the expectation of rational behaviour, in line with stated public objectives of these organisations and efficient market hypothesis in various forms.

The objective of this research is to test whether the actual decisions made by organisations, as groups of individuals, are influenced by a wider set of factors, such as emotions, human psychology, company culture, corporate politics and conflicts of interest.  This could provide a better tool kit for actuaries and other professionals in managing risks and making financial projections for these organisations.

Expected outputs

The expected output of this research is to explicitly draw out some of the key assumptions made about how institutions should behave rationally in certain scenarios and then test their validity.  Practical recommendations will then be produced which actuarial investment practitioners could use in their work.

Early research outputs

The research team have now produced a literature review which aims to better understand the relatively unexplored field of investment decisions made by pension fund trustees and identify future avenues of further exploration. This paper starts by setting out the landscape in which pension fund trustees operate and make their decisions, followed by a literature review of the behavioural finance research applicable to similar situations.

Contact Details

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