Active Portfolio Management Grounded in Evolutionary Biology - an Approach Set to Sharpen the Edge of Behavioural Finance?
24 Pages Posted: 21 Sep 2005
Date Written: May 2004
From an investment practitioner's point of view any behavioural finance based investment approach suffers from its unreliability, i.e. even a well-researched 'assumption' about the price behaviour of specific stocks, classes of stocks, etc. repeatedly demonstrates that it sometimes refuses to obey to the 'rules' once filtered out by intensive research. This fact is responsible for the oftentimes unconvincing investment returns when compared to those from investing in indices.
This paper is targeting this 'problem' by introducing a new theory broadening and complementing the theoretical basis of the behavioural finance camp currently built around two heuristics of human behaviour. This 'new' theory sheds light on a unique human capability honed by human biological evolution. This unique capability is responsible for the specific kind of human (economic) behaviour and all its far-reaching repercussions.
As a less surprising outcome the very basic underlying assumption of the 'efficient market camp' turns out to be hypothetical, at best. However, the new theory also provides an explanation for the confined degree of reliability of any currently applied active behavioural assumptions' based investment approach.
This puzzle can only be resolved by drawing on evolutionary biology again which, by means of its conclusion, should make investors to selectively direct their investments along a very clear-cut pattern to be derived in that paper. Following this pattern should provide for an improved perfomance of behavioural finance based active investment approaches.
Keywords: Efficient markets, behavioural finance, portfolio construction, trend building, money management, portfolio management, risk managment
JEL Classification: C71, C72, G11, G14, G23
Suggested Citation: Suggested Citation