Behavioral Finance in Investing: The Existence and Importance of 'Investment Tribes' and Risk-Preference Diversity

Abstract

Using case studies of two investment companies, this paper highlights that organizations may have “investment tribes,” i.e., groups of individuals who appear to exhibit similar risk tendencies for gambles involving gains or losses, possibly with a wide spread of risk preferences. Tribes and risk-preference diversity can influence and impact decision-making. Quantifying and making transparent
the existence of these tribes and individual preferences, using the Risktyle methodology, which extends the original Kahneman and Tversky (1979) approach to identifying risk biases, could improve decision-making, especially in market crises such as that of March 2020. The framework presented can be helpful for investment firms and investment advisors, allowing them to become aware of potential biases. It also can be useful for asset owners that delegate decisions to third parties, because it allows them to understand how the investment firms they delegate to might behave when drawdowns result during market crises.

Keywords: Behavioral Finance; Investment Tribes; Risktyle, Consistency Smile, Behavioral Diagnostic; Behavioral Bias; Loss Aversion; Risk Seeking; Investment Decision-Making

JEL Classification: G11, G40, G41