1. Portfolio Analyses
Insight you can act on
Cabot Behavioral Analysis (CBA) begins by analyzing the buy/sell decisions within a portfolio. The analyses then uncover persistent patterns or behaviors amongst the buys and sells. For example: Is your selling sometimes unintentionally affected by erratic price movement or changes in consensus forecasts? Do you regularly sell winners differently than losers?
CBA then computes the potential for enhanced performance associated with altering each of the behaviors identified. Can changing one or more of these behaviors add 50 bps, 100 bps, 150 bps or more to annual alpha and return? Finally, CBA computes the statistical significance and predictiveness (e.g., In Sample and Out-of-Sample testing) associated with shifting each behavior.
2. Shift Selection
Honing decisions
Cabot Behavioral Analysis then selects that group of shifts, from among all potential shifts, that provides the greatest combined expected benefit (basis points) and predictiveness (likelihood the benefit will last). The process or algorithm used begins with the very best finding or shift and then selectively adds shifts that both increase benefits and improve predictiveness. For some clients this means implementing 4 or 5 shifts at once. For others it might mean focusing on 1 or 2 shifts. The outcome is always to identify that small number of shifts that deliver the greatest benefit with the strongest statistical significance. The final shifts enable managers to address aspects of their decision-making which, when honed, will provide substantial and lasting improvement.
3. Implementation & Support
Where insight and decisions become results
You begin to capture incremental performance the first day you implement your Behavioral Shifts. And, the dividends compound every day thereafter.
Cabot Behavioral Analysis supports the implementation of your shifts with 3 daily indicators. 1. Discouraged Buys helps you improve by avoiding those buys which are shown to have persistently underperformed; this allows you to focus more energy and capital on what really works. 2. Discouraged Sells assists you in selecting which positions to let run. Capturing all the performance in your buys requires knowing where your advantage runs long and allowing those positions to deliver their full performance. 3. Favored Sells represent positions that tend to stay in your portfolio beyond their usefulness and are ready for recycling. Favored Sells point you to positions that are excellent sources of liquidity to support new buys or fund outflows.
4. Review & Improvement
Learning never ends
Cabot Behavioral Analysis (CBA) helps you manage your success with a variety of concise, intuitive reports. You can start with portfolio level measures of behavioral improvement and then drill all the way down to asset-by-asset information. You learn what you want when you want it. That way every decision you make can be well informed – putting maximum power behind your judgments.
About Cabot
Cabot helps equity fund managers improve portfolio performance. We do this through the rigorous application of Behavioral Finance. The results include a better understanding of your investment behaviors, small but decisive changes you implement to make better investment decisions, with opportunity to deliver better alpha, return an asset growth.
(http://www.cabotresearch.com/story.php)Michael A. Ervolini, Chief Executive Officer
Mike has over 27 years of experience in institutional investment management and software development. Cabot Research reflects his dedication to assist investors in improving performance by enhancing decision-making with solutions that deliver impact through clarity and greater control.
Hal Haig, President
Hal is committed to providing institutional investors with effective, practical and innovative tools and techniques to drive performance. He leads Cabot Research’s development and sales
Suggested Readings (By Cabot)
Papers
All that Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors
Barber, Brad M., and Terrance Odean
EFA 2005 Moscow Meetings Paper
November 2006
Boys will be boys: gender, overconfidence, and common stock investment
Barber, Brad M., and Terrance Odean
Quarterly Journal of Economics
116.1 (2001): 261-92
Once Burned, Twice Shy: How Naïve Learning and Counterfactuals Affect the Repurchase of Stocks Previously Sold
Odean, Terrance, Michel Strahilevitz, and Brad M. Barber
September 2004
Do Day Traders Make Money? Evidence from Taiwan
Barber, Brad M., Yi-Tsung Lee, and Terrence Odean
May 2004
The Disposition Effect and Momentum
Grinblatt, Mark, and Bing Han
NBER Working Paper No. W8734
January 2002
The Tyranny of Choice
Schwartz, Barry
The Chronicle of Higher Education
January 23, 2004: B6
Just How Much Do Individual Investors Lose by Trading?
Barber, Brad M., Yi-Tsung Lee, Yu-Jane Liu and Terrance Odean
AFA 2006 Boston Meetings Paper
October 2006
The Role of Social Context in Investing
Mauboussin, Mike
CSFB Research Paper
January 13, 2004
Individual Preferences, Monetary Gambles, and Stock Market Participation: A Case for Narrow Framing
Barberis, Nicholas, Ming Huang, and Richard H Thaler
American Economic Review
September 2006
A Survey of Behavioral Finance
Barberis, Nicholas, and Richard H. Thaler
September 2002
Articles
Mind over money: Behavioral research may explain why people spend and save the way they do
Gavin, Robert
Boston Globe
December 19, 2005
Story describes purpose and vision of the newly created behavioral economics center, at the Boston Federal Reserve Bank.
Mind Games: What neuroeconomics tells us about money and the brain.
Cassidy, John
New Yorker
September 18, 2006
Lessons From The Brain-Damaged Investor
Spencer, Jane
Wall Street Journal
July 21, 2005
The Testosterone Factor in Mutual Funds
Hulbert, Mark
New York Times
January 29, 2006, late ed., sec 3: 5
The Futile Pursuit of Happiness
Gertner, Jon
New York Times
September 7, 2003
Thought for thinkers: 'Follow your gut'
Cook, Gareth
Boston Globe
February 17, 2006
Books
Advances in Behavioral Economics
Camerer, Colin F., George Loewenstein, and Matthew Rabin, eds.
New Jersey: Princeton UP, 2003
Advances in Behavioral Finance, Vol. 2
Thaler, Richard H., ed.
New York: Russell Sage, 2005
Choice, Values, and Frames
Kahneman, Daniel, and Amos Tversky, eds.
New York: Cambridge UP, 2000
Famous First Bubbles: The Fundamentals of Early Manias
Garber, Peter M.
Cambridge: MIT, 2000
Judgment Under Uncertainty: Heuristics and Biases
Kahneman, Daniel, Paul Slovic, and Amos Tversky, eds.
New York: Cambridge UP, 1982
How Customers Think: Essential Insights into the Mind of the Market
Zaltman, Gerald
Boston: Harvard Business School, 2003
Heuristics and Biases: The Psychology of Intuitive Judgment
Gilovich, Thomas, Dale Griffin, and Daniel Kahneman, eds.
New York: Cambridge UP, 2002
Rational Choice in an Uncertain World: The Psychology of Judgment and Decision Making
Hastie, Reid, and Robyn M. Dawes
Thousand Oaks, California: Sage, 2001
Social Psychology and Economics, 1st ed.
Cremer, David D., Marcel Zeelenberg, and J. Keith Murnighan, eds.
Mahwah, New Jersey: Lawrence Erlbaum, 2006
(http://www.cabotresearch.com/readings.php)
Contact Address
Cabot Research, LLC
11 Beacon Street, 10th Floor
Boston, MA 02108
617.624.0440
info@cabotresearch.com
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