RWH069: The Psychology of Investing w/ Emily Haisley

Emily Haisley leads the behavioral finance team at BlackRock, the world's largest asset manager with more than 14 trillion dollars in assets under management. She holds a PhD in psychology and her team sits within the risk and quantitative analysis group, operating as an independent consultative body so portfolio managers can discuss biases and mistakes without career consequences. Her team builds behavioral analytics by starting from the academic literature and calculating identified biases directly in portfolios, covering loss aversion, disposition bias, endowment effect, overconfidence, myopia, and excess trading. The goal is to help investors identify systematic, costly mistakes, understand where they have genuine edge, take less risk where they lack it, and take more risk where they have it.

Haisley frames bias identification as opportunity rather than threat to reduce defensiveness, and the coaching process is kept separate from compensation and promotion decisions. She considers a clean analytics result a less useful outcome because it means fewer opportunities to help a manager improve. Systematic mistakes are often fairly easily corrected once identified, whereas random mistakes are harder to address. Teaching people about biases is frequently insufficient to change behavior because the bias must be built into process structure and experienced physically as well as cognitively.

A key diagnostic question she applies when investors cut risk during drawdowns is whether the action represents pain management or genuine risk management. Emotions around a position are useful if they provide information relevant to the investment decision but are problematic if they stem from past experiences or self-focused fears unrelated to the actual decision. She draws on George Loewenstein's paper Risk as Feelings and his work on hot and cold state decision making to inform her work with investors under stress. Losses are approximately twice as painful as an equivalent gain is pleasurable according to prospect theory from Kahneman and Tversky, and disposition bias leads investors to hold losing positions too long as a direct consequence of the same loss aversion framework.

Disposition bias is only flagged as a genuine problem when it proves costly, meaning losing positions fail to mean revert and gains are taken too early, causing missed future returns. Some contrarian investors may show a pattern resembling disposition bias but are actually adding risk when markets overreact to negative news and positions mean revert, which is a meaningfully different dynamic. Haisley uses wearable technology, primarily the Oura ring, on a voluntary and confidential basis to link portfolio managers' physiology to portfolio activity. Laboratory research found that sustained cortisol administration over roughly one week biased participants toward risk aversion compared to a placebo group, and the particular danger is when cortisol elevation stems from personal life factors entirely unrelated to market conditions, causing investors to become more risk-averse at precisely the wrong moments.

Sunk-cost bias is the number one bias to overcome in private asset investing including real estate, private equity, private credit, and infrastructure, because walking away from a deal after due diligence has been done feels like a loss. Haisley described reforming an investment committee that had close to a hundred percent deal approval over seven years. Reforms included pre-meeting anonymous voting anchored to the distribution of previously approved deals, an outside devil's advocate specifically licensed to think about what could go wrong, pre-mortem analysis imagining three years forward that an investment was a colossal mistake, and blind anonymous voting at the final stage to remove social pressure. Committee composition changed from zero women to three women, and Kahneman's principle that the second person added to a group should bring a different perspective rather than being the next best expert in the same area guided the restructuring.

BlackRock uses an AI-powered simulation game that loads a team's actual portfolio positions and presents news headlines requiring teams to decide whether and how to react, causing the portfolio to draw down in the same way it would in real life. A key finding is that group decision-making processes must change under time pressure, with leaders needing to become more directive. The game identifies hot states during which teams simply should not be making investment decisions and need a cooling-off period. The central benefit is that teams experience stressful drawdown scenarios with an excited rather than painful emotional response, enabling a different perspective on problem-solving.

Haisley identifies the single trait pervading every good investor as not being caught up in ego and being more interested in understanding markets than in being proven right. She cites Tetlock's finding that active open-mindedness defines good forecasters, who hold strong convictions but update them when faced with better arguments because their egos are not fragile. She argues that self-critical thoughts burn mental energy and shift focus inward away from the task itself, and that things people believe help their performance can actually hurt it. Her three personal resolutions are stopping harsh self-criticism by treating it as a bad habit, using breath awareness to observe and then control emotional state, and becoming a better listener both to other people and to her own nervous system. She argues that going slow to go fast prevents falling into an inefficient hole that requires costly recovery, and that interspersing work with rest produces greater long-term productivity than pushing through without breaks.