Cabot Research is on the cutting edge of behavioral finance. (You can read a recent article here.) They gather fund manager transactional data and try to figure out what the manager is doing right and what can be improved by changing behavior. They claim to be able to improve performance by up to 100 basis points, even with professional fund managers, simply by addressing the systematic errors in behavior that are being made.
At Dorsey, Wright Money Management, we’ve taken a slightly more rigorous approach. Instead of trying to modify our behavior—and hoping that the fixes persist over time—we test everything. That makes it easy to see what happens when one variable is changed. The whole investment process can be de-constructed and examined, which is something of an ongoing project here. Like Cabot, we find that correct long-term investment decisions are sometimes counter-intuitive. You wouldn’t be able to sort that out without testing.
