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When factors and behavioral biases meet

When factors and behavioral biases meet

25-11-2022 | Insight

Behavioral finance shines a spotlight on how psychology influences investor behavior which in turn has an impact on financial markets. This plays an important role in explaining factor premiums and assessing the extent to which they will be sustainable in the long run.

  • Lejda Bargjo
    Lejda
    Bargjo
    Quant Client Portfolio Manager
  • Jeroen Hagens
    Jeroen
    Hagens
    Investment Specialist
  • Lusanele Magwa
    Lusanele
    Magwa
    Investment Writer

This school of thought proposes that investors are not fully rational in their actions, but instead allow their decisions to be influenced by emotions that can be the source of behavioral biases. Much of the work in behavioral finance shows that people consistently make mistakes, even when they have been alerted to their tendency to do so.

At Robeco, our quantitative solutions seek to exploit these deeply entrenched biases through a disciplined, transparent and systematic approach that keeps emotions at bay and takes advantage of market inefficiencies driven by human behavior.

In this publication, we first look into how behavioral biases can affect investors and how quant investing can benefit from the resulting market inefficiencies by featuring the insights of our in-house experts: Head of Quant Equities, Pim van Vliet; Chief Researcher, David Blitz; and Head of Factor Investing and Professor in Behavioral Finance at Erasmus University Rotterdam, Guido Baltussen.

We then explore why risk-based theories fail to adequately explain the existence of the low volatility, momentum, quality and value factors, and why behavioral biases actually give rise to them. Then, in closing, Remco Zwinkels, Professor of International Finance at Vrije Universiteit Amsterdam, touches on his work in the field of behavioral finance and shares some interesting anecdotes.

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