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| Type | Master's Thesis |
| Scope | Discipline-based scholarship |
| Title | Anxiety and Investment Performance |
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| Institution | University of Zurich |
| Faculty | Faculty of Economics, Business Administration and Information Technology |
| Number of Pages | 97 |
| Date | 2015 |
| Abstract Text | There is an almost infinite number of portfolio optimisation approaches; from the classical modern portfolio theory to smart beta approaches. Most of them rely on the assumption of a rational investor who is able to assess the outcome of the decision and stick to his approach over the entire investment journey. Following this argument, one could say that the market price of an asset should not deviate strongly from the fair value. However, it can be easily shown that this is not the case; bubbles and busts are the best example. What makes an investor consciously investing into an overvalued market or fleeing as soon as markets start tumbling? Almost everyone agrees that investors are driven by emotions, something which is often neglected in those models. The relatively new approach of emotional finance sheds some light on this behaviour. It states that emotions cannot be left out of the decision making process and that investors are not fully rational. They give up some return opportunity for a comfortable investment journey and to sleep better at night. This thesis takes up this argument and examines what drives professional investors’ emotion and how it influences the decision making process. The focus lies on anxiety; the fear of failure or a feeling of worry about an uncertain outcome. It additionally investigates if experience has an effect on the decision making process. Is an investors that experienced several market crashes more cautious or does he have a better perception of his own risk behaviour? This paper contributes to the current literature by examining the effect of anxiety in the investment process of professional portfolio managers. In a first part, it brings together several views from different authors, describes the mechanism of anxiety and it shows that active fund managers feel anxiety and exhibit so called coping mechanisms. Coping mechanism is a way or behaviour that helps them to deal with emotions. A model was developed to link the different approaches. It shows that anxiety can be grouped into anxiety triggers and reasons. The first one is an activator for anxiety; anxiety is not a constant feeling and only arises in certain, usually unpleasant situations. The triggers usually relate to market movements (such as a high drawdown or high volatility) or to reporting (such as negative performance, tracking error etc.). The anxiety reasons explain why an investor might deviate from the assumption of a rational investor; such as the fear to lose clients for example. |
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