Resilient outcomes

Behavioural bias: tune in – and turn off the noise

Behavioural bias can distort markets, creating volatility. How can investors avoid and exploit this?

2020 M11 9

17 minutes

Rhynhardt Roodt
Christine Baalham
Jonathan Parker
Behavioural bias can distort markets, creating volatility. How can investors avoid and exploit this?

The fast view

  • Recent market volatility has shone a spotlight on how behavioural bias can distort markets
  • Sentiment-driven market reversals can obscure which trends will be sustainable and drive a disconnect between equity markets and company fundamentals
  • We explain what behavioural bias is prevalent in markets today – including saliency, confirmation bias, present bias, loss aversion and anchoring – and how it creates mispriced opportunities for investors
  • The 4Factor approach allows us to tune in to see where prices may be distorted by market reactions and turn off the noise to objectively assess opportunities
  • By harnessing the objective output of technology and then applying our fundamental experience and analysis, we can provide active management that benefits from human judgment without the distractions of emotion


While financial markets and traded instruments have become increasingly complex in recent decades, at heart they remain a product of their human participants. In everyday life, human instinct can be helpful, but it can be incredibly unhelpful in a financial setting. For example, fear of regret nudges investors to jump on bandwagons (or ‘herding’), while fear of loss often outweighs the desire for gain.

These behavioural traits are illustrated by recent market volatility. Loss aversion initially drove markets lower as COVID-19 struck, only to be replaced by fear of missing out which subsequently led to significant rallies.

Such volatility and trend reversals make it difficult for investors to assess what is and will be enduring. This is where we believe the combination of a structured process and in-depth focused fundamental research has benefits for investors. Exploiting and understanding behavioural bias enables investors to tune in to see where prices may be distorted and turn off the noise to objectively weigh up the opportunities. In this viewpoint, we explain the ones that we believe are prevalent in markets today and how we aim to avoid and exploit behavioural bias.


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General risks

All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results.

Authored by

Rhynhardt Roodt
Portfoliomanager
Christine Baalham
Portfoliomanager
Jonathan Parker
Portfoliomanager

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