Wes Gray, managing director at Cleveland-based firm Empiritrage and assistant professor of finance at Drexel University in Philadelphia, is a self-confessed “academic at heart,” which is why he follows closely the new research on behavioral finance coming out of universities.
However, behavioral finance principles also interest Gray because they are key to the quantitative asset management methods that Empiritrage follows.
“We want to avoid all issues associated with behavior,” Gray said.
Empiritrage’s success lies in building quantitative models that will invest in markets and situations that human beings, because they are conditioned by a range of different investment biases, won’t.
“Everyone knows that for the most part, cheap stocks are only cheap because of some short-term investor pessimism, and there is overall evidence to suggest that they are not pieces of junk,” Gray said. “But still, it’s very hard for most investors to go in and buy those stocks, though many may offer value, and most of them aren’t analyzing a particular company’s long-term track record.”
A model can do that, though, particularly one that has been built to screen for and counteract predictable human behavior and investment biases.
“While a human being can’t buy cheap stocks, a computer has no feelings,” Gray said. “We know that there is a history behind stocks, but because we can’t get ourselves to buy them on our own when they’re so cheap, we get a computer to do it for us; all of us, me included, are subject to the same inbuilt biases.”
Making the best investment moves, then, means not only recognizing these biases, but being as far removed from them as possible. “The computer is the only way to protect ourselves from ourselves, so to speak, because we can succumb to the same behavior as anyone else. If we make decisions based purely on numbers, we can avoid the mistakes everyone else makes,” he said.