I want to know if there are some standardized measures to evaluate how irrationally human a portfolio manager is. Are there any performance measures or scorings for behavioral finance effects? How "human" is the manager of a portfolio?

What kind of ratios are there and which data do we need to compute them? (do we only need portfolio and benchmark or the P+L of each single position for example)

Possible effects I can think of right now are:

-) In a benchmarked mandate: Tracking Error is larger if portfolio underperforms (gambling on the losses) than when it outperforms (securing the profits).

-) Volatility decreases when fund ytd performance close to zero (out-)performance (afraid of the "sign effect" because for the average investor it will make less a difference if performance decreases from +0.03% to +0.01% than from +0.01% to -0.01%

Are there any measures of (these) behavioral effects you can think of? How would you measure things like that? Any standard works on this topics I am missing here?

Please note that I dont want to know which effects there are but how to measure them objectively and to secure comparability of the measure to some extent.

  • $\begingroup$ One way might be to look at the herding tendencies of the manager. Or perhaps beta herding. http://www2.warwick.ac.uk/fac/soc/wbs/subjects/finance/faculty1/mark_s/sentiment.pdf. More herding = more human. Also maybe you should look at the fundamentalists and chartists literature? $\endgroup$
    – user2921
    Oct 2, 2012 at 9:47
  • $\begingroup$ I think that you will have to device specific tests for the effects that you mention, but also for a range of others. Doubt if there will be one blanket one. best I can think of is to compare the portfolio to benchmark... but that will immediately just measure deviations form market (benchmark) Is benchmark hugging not also a "human" effect. $\endgroup$
    – Joop
    Jul 3, 2013 at 9:42
  • 3
    $\begingroup$ One behavioral effect is window dressing: clients look into there portfolios on a quarterly basis (factsheets, notice period for hedge funds...). Managers increase their holdings by end of the quarter in those asset classes that had a good run so far. You can measure this quite easily by looking at holding increases of the best performing assets and see if more is happening by quarter end. Question is, if this is irrational. From the standpoint of the manager it is not assumed he makes clients happy, holds AuM. One has to evaluate if it hurts long-term performance. $\endgroup$
    – chriscross
    Sep 3, 2013 at 10:45
  • $\begingroup$ What you'll need to do is control for their mandate. So you need to look for these type of behavioural stuff that emerge as a result of a deviation from their mandate. $\endgroup$ Feb 9, 2014 at 17:38
  • $\begingroup$ @user2921 you meant this paper www2.warwick.ac.uk/fac/soc/economics/news_events/calendar/… $\endgroup$
    – lehalle
    Mar 6, 2014 at 20:52

2 Answers 2


More measurable effects to add to your list:

  • "window dressing" - returns of the fourth quarter or 12th month (i.e. year-end) are higher on average than oher returns; the same to returns of 4th months (qtr-end) vs. others;
  • "herding": changes in asset-classes shares of "big" funds (whatever you define "big") granger-cause changes in asset-classes shares of "small" ones; or, broadly, there is some consistent group of portfolios, which changes systematically granger-causes changes in all other portfolios;
  • "home bias" - share of local assets is higher even if mandate allows to diversify more broadly.

Overall, it's very hard to find settings for "classic" - laboratory - biases in real life situations. Usually when you try to do it, i.e. check whether some observed behavior is bias, you have to state the center - i.e. what you assume as rational behavior. Which means that you have to answer very hard and requiring question first: what behavior is "right".

Say, herding could be both rational and irrational. In CAPM-rationality only beta matters for expected return of the asset (ergo - for the share of the asset in your portfolio) because (1) particular type of rationality is assumed (only risk and return matter, risk-aversiness due to DMU of wealth, etc.etc.), (2) everyone shares this type of rationality, (3) if he doesn't - then he eventually would be out of the market. Then if CAPM holds, only exposure of the stock to some economy-wide risk factor should be priced; no systematic herding should be observed; if it is - it is declared irrational and those who exhibit herding would be finally wiped out by those who does not exhibit herding (i.e. by those for whom only risk-return matter etc etc). But in fact, if you are the only one who cares for risk/return and all CAPM stuff in the world, filled with herders, than you will be the prey, not them. If everyone herds - it's irrational not to herd. Etc etc.


I believe there are several questions being asked. Since there are several behavioural patters that could be measured I suggest to first identify which is of most interest. See Hersh for a good summary of patterns. For most behavioural patterns that I can think of you would need transaction data.


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