Insights   •   Equities

Why Investor Psychology Matters in the Search for Alpha

  • In this episode of “Human Led/Research Test,” our Active Quantitative Equity podcast, Celina Rogers talks to Toby Warburton, co-head of Portfolio Management for Active Quantitative Equity,about how quantitative investors convert human tendencies into investment insights. 
  • Warburton describes how predictably irrational behaviorsuch as “the disposition effect” —in which investors hold losing positions too long and sell winners too soon —can be exploitedin quantitative investment strategies.


Alpha: Alpha is used in finance as a measure ofperformance. Alpha, often considered the active return on an investment, gauges the performance of an investment against a market index or benchmark which is considered to represent the market’s movement as a whole. The excess return of an investment relative to the return of a benchmark index is the investment’s alpha.

Behavioral bias: Financial Behavioral Biases are deep-rooted patterns of investor behaviors which, if not managed, can cause a client to make irrational decisions on a regular basis.

Behavioral economics: Behavioral economics, along with the related sub-field, behavioral finance, studies the effects of psychological, social, cognitive, and emotional factors on the economic decisions of individuals and institutions and the consequences for market prices, returns, and the resource allocation. Behavioral economics is primarily concerned with the bounds of rationality of economic agents.

Factors: Factor investing is an investment strategy in which securities are chosen based on attributes that are associated with higher returns.

Factor investing requires investors to take into account an increased level of granularity when choosing securities; specifically, more granular than asset class.

FANG stocks: FANG is the acronym for four high-performing technology stocks in the market as of 2017 –Facebook, Amazon, Netflix and Google (now Alphabet, Inc.).

Forecasting: The use of historic data to determine the direction of future trends.

Momentum: Momentum is the rate of acceleration of a security's price or volume –that is, the speed at which the price is changing. Simply put, it refers to the rate of change on price movements for a particular asset and is usually defined as a rate. In technical analysis, momentum is considered an oscillator and is used to help identify trend lines.

Quality: Quality has long been established as an investment approach, dating back to Benjamin Graham, but it is less well accepted as a factor, especially when compared with value, size, yield, momentum and low volatility. Quality is defined by low debt, stable earnings, consistent asset growth, and strong corporate governance. Investors can identify quality stocks by using common financial metrics like return to equity, debt to equity and earnings variability.

Sentiment: Market sentiment is the feeling or tone of a market, or its crowd psychology, as revealed through the activity and price movement of the securities traded in that market.

Signal: A term used interchangeably with Alpha, is a measure of performance, the excess return of an investment relative to the return of a benchmark index.

Valuation: A valuation is the process of determining the current worth of an asset or company.

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Exp Date 08/31/2020