Originally published in The Papyrus, Fall 2001. A Publication of Hermes Econometrics

The Role of Objectivity

Emotions and subjectivity can play an undesirable role in a person’s ability to execute buy and sell decisions that ultimately determine results. The real scenario described in the accompanying article will help you to experience what happened in September from the viewpoint of an asset manager. When presented with these circumstances it is hard to even imagine making objective decisions. Mathematical models force objective decision-making.

The effect of emotion on decision-making is not limited to catastrophic events in the financial community. Nasdaq markets have retreated to previously unimagined levels in the past year. There have been many chances to sell portfolios thereby increasing losses, and conversely opportunities to buy at relatively low levels.

One of the best attributes of professional money managers is making objective decisions and limiting subjective decisions. Emotion can force almost anyone off of an otherwise disciplined approach. Exuberance can lead many to buy at excessively high prices as occurred in the Nasdaq market in 1999.

Conversely, the emotional devastation that occurs at market trenches can paralyze an investor from taking the correct action, or to capitulate and sell near the bottom of a decline. Unfortunately, this occurred frequently for many investors during the Nasdaq declines of 2000 and 2001. In contrast to portfolios managed by an individual, Hermes Econometrics risk management programs reduce exposure to the impact of emotionally subjective buy and sell decisions.

Hermes Econometrics models weigh market, economic, financial and psychological statistics in an econometric model. The models incorporate closing stock and bond market price data downloaded from Nasdaq electronic feeds to reduce chances of error. The models are not aware of the intra-day psychological swings of equity markets, or of biological warfare or election results. The basis of technical analysis is that prices of assets take into account all events.

The Federal Reserve Board and major corporations around the world employ objective models. It’s been called the financial version of Mr. Spock; rational, objective, and void of emotion.based on econometrics for critical decisions. Hermes Econometrics clients have benefited from the same highly disciplined approach. This has been particularly rewarding in the tumultuous declines in 2000 and 2001. We continue to have great confidence in the ability of our models to protect and grow our clients capital as they pursue their financial goals.