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BEHAVIOURAL INVESTING: evidence from ETFs & Equity Funds.

Updated: May 25, 2021

The article will first review the past literature and main behavioural aspect of investing while in the second part we will bring examples of behavioural based investments.

BRIEF LITERATURE REVIEW On the one hand, the literature is full of studies showing that the average investor and trader considers primarily risk and return as the most important factors affecting investor’s equity investment decisions. On the other hand, investor specific characteristics also impact the decision-making process. (Bodie, 1995) provided theoretical justification for investors to reduce investments in stocks as they grow older and found that individual risk aversion decreases with age. Finally, the age factor is found to be positively related to the investor’s preference on ETF investment. (R. A. Cohn, 1975) found that married individuals allocate a smaller proportion of wealth to risky assets and research findings indicated that higher education is linked with greater risk tolerance. Finally, interpersonal communication is also important in shaping investment decisions. It includes published performance ranking, advertising, seminar, recommendation of relatives and business associates. After large returns, the investment behaviour of investors is likely to become riskier; after experiencing tremendous losses, investors may become excessively prudent or even reckless with their investment decisions. So, risk perception changes with changing performances as confirmed by (Hartman & Smith, 2012). Results from empirical investigations show that ETF investment decisions are motivated by more complicated behavioural characteristics, beyond the conventional risk and return perception. This may include the demographics and information sources (Lai, 2014).


1.Fuller & Thaler Asset Management It is a Behavioural Small Cap Equity fund managed by Thaler (Nobel prize in economics) and Russel Fuller. “There are two kinds of mistakes that produce buying opportunities: over-reaction and under-reaction” (Fuller & Thaler Asset Management). The investment strategy is as simple as that. Some investors may over-react to bad news, losses, and end-up panicking, or they may under-react to good news by not taking attention and most of all, action. A rational investor would treat both gains and losses the same way. However, most investors are not rational at all and their irrationality is mostly evident in small cap markets where even small change in volumes and price can polarize investors. Regarding the performance of the fund, it is consistently ranked in the top 5% (even 2 or 3%) small-cap funds in the US.

2.Aptius Behavioural Momentum (BEMO) and competitors As the name suggests, the company exploits the momentum and the fact that some investors tend to become nervous and reluctant to buy a stock which is at the 52-week high. Given that there are many stocks which are close to that level, the fund focuses on the top 25 and put them in its portfolio. Same approach is also taken by Alpha Architect and Cambria Funds, other players in the industry (Chris Taylor, 2017). Behavioural ETFs are still limited to a few of products including Alpha Architect’s suite of five ETFs like ValueShares US Quantitative Value and MomentumShares US Quantitative Momentum. Or AthenaInvest, which by taking advantage of the herd mentality has been able to provide a return of 20 percent year-to-date, and roughly 20 percent annually since inception in 2010. “We don’t use modern portfolio theory at all - we’re all behavioural,” said Tom Howard, AthenaInvest’s CEO and chief investment officer (Chris Taylor, 2017).

What is next? As we discovered, economic agent’ behaviour is not only relevant for policy makers and behavioural scientist. Exploiting simple human emotions such as fear, nervousness and under/ overreaction may also create profitable opportunities. It may seem weird at first, to realize that people with not as good knowledge of the finance world as many others, managed to make impressive profits in the market. Many companies are scrutinized by thousands of traders all over the world in search of price patterns. Now we understand that it is possible to potentially outperform the market by playing with people emotions. In the future, we will likely see the development of the behavioural financial products, primarily ETFs. Although focusing on the small cap niche of the market, where irrational exuberance is daily observable, nothing is stopping Behavioural Momentum products to enter other asset classes in the reasonable future.

Pietro Fadda – Editor in Chief NNC



Bodie, Z. (1995). On the risk of stocks in the long run,” Financial. Financial Analysts Journal, vol. 51, no. 3, pp. 18–22.

Chris Taylor. (2017, October 26). Oh, behave: How to make sense of behavioral ETFs. Retrieved from

Fuller: Thaler. Retrieved from Fuller & Thaler Asset Management:

Hartman, & Smith. (2012). “Factors valued by investors while investing in mutual funds- a behavioral context . Interdisciplinary Journal of Contemporary Research in Business, vol. 4, , 503–514.

Lai, K. K. (2014, July). A Behavioral Finance Analysis on ETF Investment Behavior. doi:10.1109/CSO.2014.81

Lizzy Gurdus. (2020, January 20). These are the four biggest misconceptions about investing in ETFs, says behavioral finance pro. Retrieved from

R. A. Cohn, W. G. (1975). Individual investor risk aversion and investment portfolio composition. The Journal of Finance, vol. 30, no. 2,, pp. 605–620,.

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