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November 20, 2020

How independently do financier think?

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Yesterday, we released the results of our markets survey (see below). Typically, a respondent will compare his/her responses against those of the masses in order to identify potential pitfalls of group-think. Unfortunately, the top line figures are not as helpful with this process as one would like.

So, we thought we would share a simple survey analysis to demonstrate how cognitive biases and group-thinking are formed, and how we may quantify them.

The 5 questions in our survey (below) are  somewhat interconnected, or so a financier with several years of experience would believe. For simplicity, we select 3 out of 5 questions:

  1. Question 1 – Stock market (S&P) predictions which we divide into 3 groups of responses: i) lower (down more than 250 pts), ii) unchanged (within 250 pts), and iii) higher (up more than 250 pts). This leaves 3 possibilities: up, down, about the same, with generous buffers.
  2. Question 2 – Bond yield levels we keep at the 8 options originally provided.
  3. Question 4 – Tech regulation, also keeps at the original 5 response options

It is reasonable to expect a markets professional to have an informed view on each of these points.

The math

There are (3 x 8 x 5) 120 possible combination of responses, and we had 116 respondents. How many different combination did we get, and with what frequency? Randomly selected responses would yield about one response for each possible combination (equally likely).
So, how many possible combinations did we get out of the possible 120?
Answer: 29/120
The lower this score, the higher the risk of herd mentality. As this is our first markets survey, we cannot say what would be a ‘normal level’. Intuition would tell us human intelligence prevents this number from being too high, but we should also be mindful when too low. In trading floor speak, somewhere between monkeys and sheep.
Finally, within the 29 scenarios:

42% saw stocks higher and treasury yields higher or slightly higher (prices lower)

72% saw the S&P 500 above 3600 in 6 months time and treasury yields higher or slightly higher

Counter consensus would have stocks lower and bond yields lower. A shock would see treasury yields negative and deregulation of Big Tech.

A portfolio manager is tasked with assessing the real-world probabilities of each outcome, the associated uncertainties, against the potential investment returns, in order to make the most suitable decisions for their investors.

Our analysis here overlooks the many complexities that interplay within the financial services industry: benchmarking, client portfolio flows, fiscal, and monetary policy shifts, to name but a few.