Greg Davies analyzes crowd psychology and group decision-making dynamics to strengthen investment strategies. Three key points: 1) Investors have "myopic loss aversion" where the perceived time horizon shortens in stressful periods, distorting risk perception. This creates an "anxiety premium" where returns are lower. 2) Groups can outperform individuals through wisdom of crowds effects like estimating and problem solving. However, groups also face weaknesses like homogeneity, social influence, and social loafing that reduce performance. 3) Diversity, specialization, independence, and an effective consensus process allow groups to become greater than the sum of members by overcoming weaknesses and leveraging strengths like different information sources and

1. Crowd Psychology
Analysing group decision-making dynamics to fortify
investment strategies and committees
Greg B Davies
Head of Behavioural and Quantitative Investment Philosophy
@GregBDavies

2. 2

3. 70 75 80 85 90 95 00 05 10
Sell date, 70
quarterly If you bought in 1975
75 and sold in 1995,
your average annual
80 return would have
been 12%
85
MSCI World 90
Buy date,
Equity quarterly
Annualised 95
Returns 00
Past performance is not a reliable indicator of future results 05
-5% to 0 to 5 to 10 to
<-5% >15% Source: MSCI World Index, 1970
0% 5% 10% 15% - August 2011, Barclays Wealth 10

4. 70 75 80 85 90 95 00 05 10
Sell date, 70
quarterly
Buy date, 75
quarterly No nominal losses
80 over any holding
period of 12 years
85 or more
MSCI World 90
Equity
Annualised Zone of 95
Returns Anxiety
00
Past performance is not a reliable indicator of future results 05
-5% to 0 to 5 to 10 to
<-5% >15% Source: MSCI World Index, 1970
0% 5% 10% 15% - August 2011, Barclays Wealth 10

5. Myopic Loss aversion and the Anxiety premium
Probability of loss at different holding periods
45%
40%
Zone of Anxiety
35%
In times of stress our emotional
30%
time horizon shortens and
25% distorts our risk perception
20%
15%
10%
5%
0%
1 2 3 4 5 6
Holding period (years)
Past performance is not a reliable indicator of future results Source: MSCI World Index, 1970 - August 2011, Barclays Wealth

6. Emotional liquidity: the journey matters!
Which investor is happier at the end?
(Green, black or red)
Portfolio
Return
Danger of buying high
Danger of selling low
Time
6

8. Financial Personality Assessment
Traditional Approach Barclays Wealth Approach
Risk Tolerance Risk Attitude Decision Style
HIGH HIGH HIGH HIGH HIGH HIGH HIGH
PERCEIVED FINANCIAL
ENGAGEMENT
COMPOSURE
DELEGATION
TOLERANCE
DESIRE FOR
EXPERTISE
BELIEF IN
MARKET
SKILL
RISK
LOW LOW LOW LOW LOW LOW LOW
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9. Personality and the Zone of Anxiety
Risk Tolerance Composure
Mean Personality Scores
4
3
2
Disagree Agree
I buy and sell investments more than I should
Source: Barclays Wealth Insights Volume 13

10. Becoming a better investor
Pro-cyclical Counter-cyclical
Skill Required Requires
clairvoyance,
not skill
Reactive Investor Constant Investor Tactical Investor The Seer
Buys high, Regular Tactical rebalancing Buys low,
sells low rebalancing sells high
Difficult to
avoid
Emotional Difficulty temptation
Most investors A little composure A countercyclical Attempts to time
follow this pro- can significantly tactical approach the market are
cyclical pattern increase returns is likely to pay off dangerous
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11. Teams can outperform individuals…
Estimating (wisdom of crowds) The only function of economic forecasting
Weather forecasting is to make astrology look respectable
Problem solving J. K. Galbraith
Estimating the weight of a bull Forecasting financial markets
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12. The Cycle of Market Emotions
Irrational exuberance
due to fear of missing out
Exuberance and herding
Excitement
Denial
Optimism
Fear
Anxiety premium Reluctance
Reluctance
Desperation Indifference
Panic Apathy
Capitulation Depression
Despondency
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13. Weaknesses of groups and teams
1. Homogeneity 2. Contamination
We associate with people more like us When we learn others opinions we tend
than random: default group of members to over-weight their opinions, especially
tends to not be very diverse when they agree with us
3. Conformity 4. Social Loafing
We don’t put effort into finding
We worry about publicly disagreeing with
information and thinking out our own
others for social or authority reasons, so
opinion when we know others will be
tend to agree with leaders opinions
supplying their views
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14. We underestimate how differently others see the world
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15. …and how differently others see the Market
Bears: Others investors are bearish Bulls: Other investors are bullish
50% 50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%
Large Small No Small Large Large Small No Small Large
loss loss change gain gain loss loss change gain gain
Bear’s Opinion Bulls Opinion
Source: Egan, Merkle, Weber, “Naïve Realism and Investment Decisions”, Manuscript, 2011, based on Barclays Wealth 2008-2010 survey of 620 UK-based investors.

16. Weakness: Conformity
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18. On average…
Risk Composure M arket Perceived Delegation Belief in Skill
Tolerance Engagement Financal
Expertise

19. Individual variation matters
Risk Tolerance Composure
High Risk Risk High Composure Composure
Tolerance Tolerance
Low Low

20. Composure and Risk Tolerance
High
Composure
Low
Low High
Risk Tolerance

21. Individual variation matters
Delegation Belief in Skill
High Delegation Delegation High Belief in Skill Belief in Skill
Low Low

22. Being greater than the sum of your members
Diversity Every trustee will have their own information and facts, but
not necessarily all the relevant facts
Specialisation Some trustees focus on specific areas, becoming better or
more efficient at gathering or using information
Independence It’s very important that people's opinions are heard openly
and aren't limited by other group members
Consensus Mechanism required for turning private judgments into a
collective decision. Some are better than others
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