Investment Behaviors

Investment behaviors+ refer to irrational behaviors shown by investors after they make an investment decision and results are not what they expect. We see these behaviors as investors try to rationalize the investment decision. Did I pick the right stock? This other stock seems to be taking off, maybe I should have invested there. Why is my stock price flat or falling? Should I sell and cut my loses, or should I hold on and wait for it to recover?

Investment behaviors are important for World Class R&D for two reason: they are broadly applicable to the investment decisions made by the members of the R&D governance board, and they are well-studied. One of the most important activities of the governance board is the placement of funds across many alternate investment opportunities. Decisions are made, results tracked, similar to investments in the stock market (i.e., with the caveat that they are typically investing Other People’s Money+), and consequences are meted out. Individual reputations are at stake based on the success or failure of investment decisions.

It’s rare we have such a broad consensus on a class of behaviors, and solutions to contain those behaviors. This treasure should not be wasted. We design the mechanism used by the governance board to make investments decisions in a way that minimizes irrational investment behaviors. For example, built into the mechanism are checks and balances to avoid ‘churn’ – buying and selling based on any small hiccup in the investment results. This and several other behaviors common to investors have ready-made solutions available for use in a World Class R&D organization.