Investment decisions should be evidence-based
June 2, 2016
Evidence-based decisions are becoming more prevalent in all walks of life.
Instead of subjective, ‘expert-based opinions’, evidence-based decision making objectively analyzes the best data available to make empirically supported decisions.
One reason for this shift is the rapidly growing amount of knowledge humans have, due in part to the amount of research being conducted.
There are tens of thousands of universities in the world and many offer PhD programs in varying disciplines. The goal of a PhD thesis is to provide new research.
Many scholars continue with post-doctoral research, plus professors often conduct research. The net result is hundreds of thousands of scholars are conducting research and as a result our world is getting a whole lot smarter.
It was not that long ago that discussions about excessive brutality in the National Hockey League was subject to personal opinion.
Now personal opinion has become obsolete and there is concrete science available to observe concussions.
Professional hockey and football will be hard pressed to justify the medical risk to players as scientific evidence of head injuries continues to grow.
Lawyers are going to have a field day arguing on behalf of their injured retired athlete clients that better protection should have been provided. Evidence is on their side.
So now for the tricky part. How do you incorporate academic research in your investment decision-making process?
From experience I can say that it is difficult. Earlier in my career my continued learning, and ongoing education was investment industry centric.
Regrettably investment performance earned by investors is subpar. On that basis our investment industry gets a failing grade.
Many years ago when I first started studying academic research I was reluctant to switch my allegiance from investment industry information to the academics.
Inertia has a way of keeping you tied to your old ways.
The question is simple: Who has the responsibility to insure you use evidence-based decision-making in your investment process?
The answer is also simple: You do.
Everything you do in life, including making investment decisions, should be based on evidence.
Many people already conduct their own research on medical issues, and have a discussion with their doctor based on evidence obtained by their research.
It is my opinion that many advisors in the investment business are getting a free ride.
Their clients are not questioning the logic of decisions or looking for concrete evidence to support normal investment decisions.
Scientific peer-reviewed research is available to help you with investment decisions including asset allocation, diversification, and investment strategy.
This provides the foundation of how you should build an investment portfolio.
The amount of information continues to grow.
We live in the information age and if you are not incorporating accepted and proven academic research in your investment decision-making process then your long-term results are likely to be disappointing.
The world has changed.
We have the knowledge. Now we have to use that knowledge.
I encourage you to make evidence-based investment decisions.