Behavioral Finance at JP Morgan
Basically, behavioral finance looks at why investors make bad, irrational decisions – whether it’s holding on to losing stocks for too long or selling winners too early. JP Morgan Chase, one of the oldest financial services firms in the world, implemented behavioral finance since about ten years ago and has been doing excellent. JP Morgan manages clients’ assets through three key business units: Private bank (affluent clients with $25 million or more in net assets), Private Client Services (client with less than $25 million in assets), and Asset Management (retail and institutional investors).
JP Morgan’s behavioral finance runs quite successful. Traditional finance theory held that investors were rational, however, Complin, CIO of behavioral finance in JP Morgan believed that irrational investor behavior led to market anomalies that could be exploited with a disciplined trading approach. They figured out that the anomalies on outperformance cannot be explained by risk, JP Morgan emphasized two behavioral biases: overconfidence and loss aversion. JP Morgan funds systematically overweight value stocks; they focus on out of fashion stocks that they wouldn’t naturally have bothered with and thus they can avoid overconfidence trap. In addition, JP Morgan requires a systematic tilt to momentum, which they run winners and cut losers. In this way, disposition effect can be minimized. JP Morgan captured the most critical human behavioral biases that people tend to be overconfident, to seek pride and avoid regret, and these behavioral biases explain why value and momentum stocks have outperformed for such a long period and will continue to prevail in the future.
JP Morgan implemented the investment philosophy into three parts: stock selection, portfolio construction and execution. One of the reasons why JP Morgan gain such huge success is that managers know they will make money by setting out to do the opposite of what most people “feel like” doing and they are doing
JP Morgan’s behavioral finance runs quite successful. Traditional finance theory held that investors were rational, however, Complin, CIO of behavioral finance in JP Morgan believed that irrational investor behavior led to market anomalies that could be exploited with a disciplined trading approach. They figured out that the anomalies on outperformance cannot be explained by risk, JP Morgan emphasized two behavioral biases: overconfidence and loss aversion. JP Morgan funds systematically overweight value stocks; they focus on out of fashion stocks that they wouldn’t naturally have bothered with and thus they can avoid overconfidence trap. In addition, JP Morgan requires a systematic tilt to momentum, which they run winners and cut losers. In this way, disposition effect can be minimized. JP Morgan captured the most critical human behavioral biases that people tend to be overconfident, to seek pride and avoid regret, and these behavioral biases explain why value and momentum stocks have outperformed for such a long period and will continue to prevail in the future.
JP Morgan implemented the investment philosophy into three parts: stock selection, portfolio construction and execution. One of the reasons why JP Morgan gain such huge success is that managers know they will make money by setting out to do the opposite of what most people “feel like” doing and they are doing