Are Investors Still Making the Same Behavioral Mistakes?

As Managing Director and Head of Global Financial Strategies at Credit Suisse, Michael Mauboussin advises clients on valuation and portfolio positioning, capital markets theory, and competitive strategy analysis. He has also authored three books -- Think Twice, The Success Equation, and More Than You Know -- and is an adjunct professor of finance at the Columbia Business School, and chairman of the Board of Trustees at the Santa Fe Institute.

We understand more about the behavioral factors of investment decisions than ever before -- but is the knowledge of why we do things enough to make us change how we do them? Not as much as you'd think, according to Mauboussin.

A transcript follows the video.

Matt Koppenheffer: That hits, again, on the behavioral mistakes people make. When I read More Than You Know -- that was 2006, right? To me, that was one of the first books that, for me, brought the behavioral part to the fore. There was a lot of academic work done before.

Do you think, between then and now, the wave of behavioral investing books and knowledge that has come to the market, has that helped people, or are they still making the same mistakes?

Michael Mauboussin: It's a super interesting question, and I think that the jury's out on that. Clearly, more people are aware of these behavioral issues than they were, as you pointed out, even 10 years ago, and certainly 15 years ago. But it's not crystal clear that that's helped people make better decisions.

Even in organizations where you talk about these ideas, unless you really have specific ways to manage these problems or mitigate these problems, the knowledge in and of itself, or even the language in and of itself, doesn't appear to be all that you need.

I think that's actually a bit of a frustration of a lot of these pioneers in decision-making and even the behavioral stuff, which is they've been able to unearth all of these very interesting issues -- and I think they genuinely want to help the world -- but they've struggled.

Now, there's one area where it seems to have worked quite well, and that is this work on choice architecture, Nudge. Cass Sunstein and Richard Thaler wrote a great book on this. Even in some public policy practices, they've been able to implement defaults, for example, that tend to be good.

Even in my company -- and I suspect many other companies are like this -- there are defaults now for how much you save. It goes into your 401(k), and those defaults are set quite high so if you do nothing, you're going to save a lot, which is probably a good thing. Only by telling them that you don't want to save so much, will you come off of that number.

Those are the kinds of things that are almost ingrained into the system, that I think can be very helpful. But for our day-to-day in our own organizations or as individuals, I think the jury's out that it's really ... the awareness is up, but I'm not sure it's changed behaviors meaningfully.

Koppenheffer: Is that the kind of thing that could be helped by a checklist or is it still, the checklist could be there, but your brain just overrides it?

Mauboussin: I think there's no question a checklist helps. I guess the evidence for that is, wherever checklists have been implemented with fidelity, they've improved outcomes.

Clearly, you would never get on a plane -- I don't think any of us would want to get on a commercial plane -- without the pilot having gone through his or her checklist in great detail. That is now much more prevalent in medicine. Certainly, even before any sort of procedure or operation, those checklists have been very, very effective. We've seen incredible, and fairly recent, case studies on how that's worked.

The world of investing is a little bit more tricky, because it's not as procedural. If you're a pilot, there are certain procedures you need to go through, and it's going to be pretty much the same every single time. Medicine, certain setup things will be very procedural.

But investing is a little bit less like that. There are areas I still think checklists can be very, very helpful, but perhaps the utility is not quite as clear or high, so that's why I don't think it's been a widespread thing.

But in my investment firm, we always developed checklists to make sure that we were doing things methodologically correct. I think just that step can be very useful for people.

Koppenheffer: And that can at least let you go back and evaluate it more easily in the future.

Mauboussin: Absolutely.