Nobel Laureate Richard Thaler is helping global fund management giant PIMCO modify its investment strategies though the use of “pre-mortems” where possible causes of failure is identified and eradicated even before a project launches.
Chris Sloley filed this report for CityWire Selector:
The addition of Nobel Laureate Thaler to a senior adviser position earlier this year has forced many senior investors to rethink their biases in this context. Joachim Fels, global economic adviser at the group, said this had been invaluable when drawing up the company’s latest cyclical outlook. ‘We had our investment committee which had a presentation from Richard Thaler. Thaler is constantly warning us of overconfidence,’ he added.
‘That is one of the main biases us humans have. In our base case scenario for the economic outlook, we are not very confident that the base line of a recession is a fat tail risk but there are downside risks to consider. Realistically, we don’t want to put too much emphasis onto one single scenario.’
It is understood Pimco has also adopted a method devised by Thaler called ‘pre-mortems’. The concept is designed to erode the need for a post-mortem when a product or initiative does not work as planned. This involves acting as if the project has failed before it has even begun and eradicating all elements that could cause it to fail.
In a white paper co-authored with Pimco’s chief executive officer Manny Roman, which was published in January, Thaler said there needs to be greater work among companies on using data and behavioral processes to improve their business models.
Sports teams are well-known for using data to track performance and, when done right, helping players utilize their strengths. In basketball, for example, they have unbelievable data on how players perform every second of the game, such as how often they make shots from certain positions on the court.
‘An investment manager such as Pimco could collect and review data on trades and traders and what triggers them to make a decision and what was the result. If you can teach somebody to hit a free throw, you could probably teach people to be better traders. Honestly, I don’t think we do enough coaching in almost any field.’