As mentioned in the previous issue, Gross finally agrees that there are certain flaws in the unrestricted investment strategy, and some restriction mechanisms are required to constrain investment decisions. In the academic world, many economists have also made different research on this. Among them, the most famous one is the monkey experiment of Princeton economist Burt Malkiel.
Buy is easy but sell is hard
The results of the monkey experiment show that the randomly selected stock portfolio performance can outperform the average institutional investor’s portfolio. Recently, researchers have further discovered that “monkey traders” do not provide excess returns in buy orders, but are better at selling decisions. The researchers checked more than 783 combinations including 4 million transactions, and the decision to sell the transaction caused the portfolio to record loss of more than 100 basis points per decision. Researchers at the University of Chicago believe that the difference between buying and selling stems from uneven resource allocation. Investors are more likely to spend time picking up stocks to buy rather than sell stocks in their portfolio.
On the other hand, there is a view that the “monkey trader” have a slight advantage in making a sell decision, compared to real fund managers. “Monkey Traders” are not affected by emotions. Traditional economic theory holds that a buyer or seller does not affect their own assessment of the value of the goods. However, the endowment effect denies this view, and the same things that they own are more valuable. Of course, behavioural bias can be optimized through mechanisms. This is exactly what star traders are also required to govern by risk management system.
Establish a selling mechanism
Analysis of new information through fundamentals is the first step to improve the selling decisions. The longer the assets are held, the more careful analysis should be done when new information is available. Analysis of new information requires a combination of subjective and objective judgment. For example, when a company’s earnings decline for two consecutive quarters, investors need to re-examine the stock. There are rules that prevent decision makers from making irrational decisions because of emotional factors.