RWH069: The Psychology of Investing w/ Emily Haisley

Emily Haisley leads the behavioral finance team at BlackRock, which manages more than 14 trillion dollars in assets. Her team sits within the risk and quantitative analysis group as an independent and consultative function, which means portfolio managers can discuss biases and mistakes without fear of consequences for compensation or career decisions. The team built a behavioral analytics suite drawn from academic literature that quantifies biases including loss aversion, disposition bias, endowment effect, overconfidence, myopia, and excess trading, with the goal of identifying systematic, costly mistakes that drag on returns. When analytics cannot be applied, such as with private assets or managers lacking sufficient transaction history, the team focuses on aligning investment process to behavioral best practice.

Disposition bias is measured by comparing the probability a manager realizes a gain versus a losing position over time. A greater probability of realizing gains than cutting losses leads investors to cut winners and hold losers, which Haisley describes using the Peter Lynch phrase of cutting the flowers and watering the weeds. Loss aversion, drawn from Kahneman and Tversky prospect theory, means a loss is approximately twice as painful as an equivalent gain is pleasurable, which underlies much of this behavior. Disposition bias is only genuinely harmful when losing positions fail to mean revert and gains are taken before further upside is captured. Warning signs include tactical trades that have quietly become long-term holds, new post-hoc theses replacing invalidated original ones, and team taboos around discussing losing positions.

Portfolio managers frequently enter new positions at too small a size because newness and change feel risky. Two structural interventions Haisley uses are setting a default position size for all new positions as a nudge toward more rational sizing, and requiring documentation of reasons to deviate from that default, which creates process friction that forces deliberate thinking rather than emotional reaction. A key diagnostic question when investors cut risk is whether the action is pain management or genuine risk management. Haisley also uses postmortems to evaluate whether emotions driving decisions are integral to the decision itself or rooted in past experience or self-concern unrelated to the actual position.

Haisley and a colleague built an AI-powered investment simulation game inspired by George Loewenstein's research on hot-state and cold-state decision making. The game loads a team's actual existing portfolio positions and presents news headlines that may be economically relevant or may be noise, requiring the team to decide whether and how to react. The exercise helps teams clarify their volatility strategy and reveals how group decision making must shift under time pressure, with leaders needing to be more directive rather than passively gathering all views. Investors who have panicked into error during volatility are unlikely to repeat that mistake, making the simulation a valuable place to make those mistakes safely, particularly for less experienced team members who have not yet lived through a difficult market environment.

Using wearable devices including the Oura ring on a voluntary and confidential basis, Haisley's team links physiological data on sleep, stress, and activity levels directly to portfolio risk decisions. Laboratory research she cites showed that sustained cortisol administration over roughly one week biased participants toward risk aversion compared to a placebo group, raising the concern that investors' risk preferences could be distorted by cortisol driven by personal or workplace factors entirely unrelated to market conditions. A key finding from the Oura ring data is that simply bringing stress information to investors' conscious awareness often broke the link between bodily stress and portfolio risk decisions.

Sunk-cost bias is the dominant bias in private asset classes including real estate, private credit, private equity, and infrastructure, where extensive due diligence work makes walking away feel like a loss. Structural reforms Haisley introduced at Thomas Miller Borger include pre-meeting blind voting at the preliminary investment committee stage, blind voting at the final stage to remove social pressure, an outside devil's advocate role rather than assigning it to an existing member, and a pre-mortem process requiring participants to imagine three years forward that an investment was a colossal mistake and work backward to identify causes. Groups tend to discuss shared information and points of agreement because disagreement is emotionally unpleasant, even though research shows disagreement leads to objectively better decisions.

Haisley connects active open-mindedness, the willingness to update beliefs when confronted with better arguments or new information, to Philip Tetlock's research identifying it as the defining characteristic of superforecasters. Good leaders promote psychological safety by openly discussing their own mistakes, speak last in meetings to avoid anchoring the group, and practice delayed judgment by staying open until they have heard independent perspectives. She identifies the defining trait across good investors as not being caught up in ego and being more interested in understanding markets than in being proven right. Awareness of a bias is often insufficient to eliminate it, which is why well-designed process structure, defaults, and commitment devices tend to be more effective than education alone.