Decision processes in professional investors: Does expertise guard against judgmental biases?

Abstract

Decision processes of professional investors in financial markets are investigated. A sample of 138 institutional and wealthy private investors, who represented a total capital of about 350 billion Euros, participated in an experiment on decision making. They answered problems in financial settings which were constructed to measure the use of the following judgmental heuristics: anchoring, framing, representativeness, and outcome-evaluation according to the peak-end rule. The findings indicate that also highly professional experts make use of these heuristics and that their decisions may contradict normative economic standards. We discuss implications of these results both for the basic assumptions of economics and for models of judgment and decision making in psychology. Pracitcal relevance: According to common sense and some models in psychology and economics, judgmental errors and biases are less probable when motivation and expertise of the decision maker are high. We report evidence that also financial experts are prone to heuristics-induced biases in their field of expertise. Analysis of the underlying psychological processes may foster the understanding of expert judgment and help to improve its quality.