Paul, how would you explain behavioural economics?Human beings have an instinctive, hard-wired reactive way of thinking, as well as a more recently evolved rational, analytical side – what Daniel Kahneman, who was awarded the Nobel Prize for Economics in 2002, calls System 1 and System 2. We all like to think that we are constantly using System 2. But the hard-wired System 1 can never be switched off and we rely on it far more than we believe.

About Paul CravenPaul Craven studied history at Cambridge before a 27-year career in the City that culminated in six years at Goldman Sachs Asset Management, as Head of European Institutional Business. His interest in behavioural economics became an intellectual passion, and he now promotes it through coaching, consulting and public speaking. However, traditional economic models assume that people are always rational decision makers who fully analyse data and act logically before they reach conscious decisions. Behavioural economics is important because it disputes this – and in my opinion, therefore relates to real people in the real world.

Indeed, whether in the fields of investment or more general decision-making, behavioural economics demonstrates the importance of challenging our in-built biases, in order to optimise our chances of reaching the correct conclusions.

How did you become interested in the subject?A big turning point was Daniel Kahneman being awarded the Nobel Prize. But what was so significant about that was that he is a psychologist.

My interest was sparked when I began to realise that psychology was as equally important as economics, indeed probably more important, in understanding how financial market participants acted, both individually and in aggregate. 

"It’s hard to think of any other performance-related professional activity where coaches and deliberate practice are not mainstream"

How long have you been speaking on the subject?Since about five years ago, when I was at Goldman. The subject was attracting attention across the whole industry at the time, partly as a result of the global credit crisis, and a lot of the UK and European pension funds and their consultants were interested in it and the fresh perspective on thinking it offered.

I found myself increasingly engaging with interested parties, both in my industry and others, including people like Rory Sutherland of Ogilvy & Mather, a thought-leader and leading light in advertising. So I decided to actively promote it, believing that individuals and companies who use it will enjoy a real competitive advantage.

I’ve also been lecturing for the Senior Executive Programme class at the London Business School for five years. Now I have joined Salomon Partners, a specialist firm dedicated to coaching asset managers in using behavioural economics. The results have been extremely encouraging.

Interestingly, in anything performance-based, whether in sport or investment, there are elements of luck and skill. One of the things that behavioural economics helps you as an investor to do, I believe, is to dial up your skill. In other words, to cut out the mistakes that you might otherwise make – and at the same time add to your insights.

This is why I am so excited about coaching asset managers. It’s hard to think of any other performance-related professional activity – sports, classical music, chess, etc. – where coaches and deliberate practice are not mainstream. Why has our industry been so different? The good news is that things are changing and we can learn plenty of psychological lessons, for example, from competitive sport.

Who are your favourite authors on this subject?Obviously Daniel Kahneman’s Thinking Fast and Slow is like the North Star in this field, but one finds brilliant insights from people like Dan Ariely and Richard Thaler. Other pioneers include Robert J. Shiller at Yale University who received the Nobel Prize for Economics last year, and I would strongly recommend Michael Mauboussin of Credit Suisse, not least for his work on distinguishing between luck and skill in financial markets.

As a historian, I also like Charles Kindleberger, who has written a lot about the bubbles in history in Manias, Panics and Crashes: A History of Financial Crises.

And as a coach, I would endorse Dr Steve Peters, psychiatrist and author of The Chimp Paradox, who was coach to GB Olympic champion cyclists like Victoria Pendleton and Chris Hoy, and this season worked with Liverpool FC. His idea – a useful metaphor for System 1 and System 2 – is that we all have an inner chimpanzee and an external human being.
"Unfortunately, in a bubble, investors start to mistake reality for fantasy"What is your background? Paul Craven gives three examples of biases stemming from irrational behaviour that give an insight into behavioural economics
Sunk cost fallacy: The ‘sunk cost fallacy’ is the mistaken belief that it is sensible to continue with a plan of action once it has been started, given that time and money has been spent and resources have been allocated to it. It is a common behavioural bias often witnessed in government projects, military strategies and corporate endeavours – because human beings do not, as a rule, like to admit they were wrong. It is hard to abandon real and emotional investment, even in the face of mounting evidence.
The sunk cost fallacy is sometimes known as the ‘Concorde fallacy’ because the first supersonic airline project, initially subsidised by Anglo-French governments, hemorrhaged money from the start. The beauty of the plane made emotional investment easy, but eventually the money ran out.

Base rate neglect: Psychologists estimate that the human brain is potentially subject to over 150 different biases, and examples include ‘Base Rate Neglect’ – ignoring the statistical facts and figures, often in favour of an emotionally appealing or attractive story. A real-life example is the popularity of some ‘pseudosciences’ like homeopathy, astrology or psychics, despite absolutely minimal supporting evidence.

 Anchoring: One of the pioneers of Behavioural Economics, Professor Daniel Kahneman, once conducted an ‘anchoring’ experiment, asking his subjects what percentage of African nations were members of the United Nations. Those asked whether it was more or less than 10% answered, on average, 25%, while the answers of those asked if it was more or less than 65% averaged 45%. I am a historian by training. I’ve always loved history because it takes a lot of jumbled facts and figures and tries to make sense of them, albeit with hindsight. In other words, it tries to establish themes and trends, and sometimes offers hints about the future.

That sounds an awful lot like investment. As an investor you’re getting lots of detail and external analysis, a myriad perspectives and sometimes an information overload. And you the investor, or you the historian, has to try and make sense of it all.

And one of the things that I’ve been particularly interested in is financial market bubbles and subsequent busts – going back to the Tulip Mania of the 17th century and the South Sea Bubble in the 18th. We’ve had land bubbles, commodity bubbles, and, of course, the famous Wall Street bubble of the 1920s, and then the crash. In my lifetime, the 1987 stock market crash and the Japanese equity bubble characterised my first decade in the industry, while the Tech Bubble of the late 1990s dominated the second. And that was before the global credit crunch just a few years ago. It’s been an exciting time, but unfortunately not always in a good way.

There is a line attributed to Mark Twain: “History doesn’t repeat itself, but it does rhyme.” I think that when we look at the way the markets behave, we often see this rhythm, even though the causes of the bubbles might be different. So the tech bubble is completely different to the credit bubble, which is completely different to the land or industrial bubbles of earlier times. And yet markets behaved – some would say misbehaved – in similar ways.

One of the fascinating insights that behavioural economics allows is that even though the underlying causes may be completely different, the way that human beings react to them, particularly when it comes to investment does seem to show many similarities.

Unfortunately, in a bubble, investors start to mistake reality for fantasy. The fact is that not many of the internet companies that were around in the nineties survived and flourished. We know the winners, and I’m reminded of the adage that history is written by the winners, such as Google, Amazon, Apple and Microsoft. But the losers, unfortunately, were many times that number.

So I see some striking similarities between an appreciation of the study of history and investment markets.

"I think it’s going to get more important in everyone’s lives, providing a competitive advantage"

Is there a parallel between behavioural economics and your other passion, magic?The thing about magic that fascinates me is the way the human mind works. It’s the common thread. And, dare I say, how it sometimes doesn’t work very well.

And a magician is using some of those hard-wired human reactions and human biases using misdirection, or fooling their minds, or hopefully making them go “Wow!”.

So, for example, human misdirection is a fascinating concept in magic. Without giving away any secrets – I certainly wouldn’t do that, as a member of the Magic Circle – the fact is that, as humans, people are hard-wired, for good evolutionary survival reasons, to notice large movements. So a magician will often disguise a sleight of hand by a bigger, obvious distraction.

People sometimes ask me, “Which came first, the interest in magic, psychology, behavioural economics or investment?” The answer is probably that history came first, followed by investment. And then over time, I became more interested in psychology and that branched into a love of magic. For me, behavioural economics draws on all these disciplines to a greater or lesser degree, and I readily use examples from each in my talks, which are always interactive.


You recently gave a Tedx Talk and you are a regular public speaker as well as a coach. What is your aim when you speak and coach about behavioural economics?As I said in that talk entitled The Mind, Markets and Magic, the underlying key reason is to promote it in business because I think it’s going to get more important in everyone’s lives, providing a competitive advantage.

One of the key messages for me about behavioural economics is to challenge any potential assumptions you may have, as these may reflect underlying biases.

Some biases you may be familiar with: one is confirmatory bias – the classic thing that we all do. We often come to a conclusion quite quickly. But then we tend to find reasons to back it up and we often filter out things that don’t quite fit our story or our argument.

There may be perfectly good evolutionary reasons to be confident. But confirmatory bias can lead you to make mistakes. You could imagine a situation in which an investment manager has lots of good reasons to own a stock, having done the research. Now what happens if the manager is faced with contradictory evidence or opinion? Often people will reject something that doesn’t agree with their view rather than re-evaluate the situation.

CV snapshot: Paul Craven

2014 to date: 

Salomon Partners 
Partner; Specialist Coach to Asset Managers

Paul Craven Partners
Founder; Consultant and Public Speaker | Behavioural Economics Specialist

2007 – 2013:

Goldman Sachs Asset Management
Head of European Institutional Business | Head of EMEA Institutional Business | Head of UK Institutional Business

2003 – 2007:

PIMCO Europe Ltd
Head of UK Business Development

1986 – 2003:

Schroder Investment Management
Head of UK Institutional Sales | Portfolio Manager

1983 – 1986:

St. John’s College, Cambridge University
MA (Hons) History 

I have always therefore liked the John Maynard Keynes comment: “When the facts change, I change my mind. What do you do, Sir?” We need to question our assumptions.

It’s interesting to see how investment managers approach unrealised book losses, for example. Do they still believe in that particular stock? Will they buy more? Or do they dislike crystallising losses and start to hope for (as opposed to anticipate) price improvement? And if they were setting up a new portfolio, would they buy the same stock – if not, why not? There are a lot of potential biases and heuristics possible in these circumstances.


You have said you believe that that behavioural economics will provide early adopters with a significant competitive advantage. Is there evidence that as a practice, it is gaining ground?It’s certainly gaining ground, not just in the financial industry (even regulatory bodies such as the Financial Conduct Authority are very keen), but also in society at large. The behavioural insights team in the Cabinet Office, colloquially called the ‘Nudge Unit’, has found plenty of ways to encourage people to do the right thing for everyone’s benefit, through understanding better how people make decisions. The team has looked at everything from school meals to tax collection to health, to savings – and the results are very encouraging. These ideas are gaining ground everywhere.

For example, in Germany, one has to ‘opt in’ to become an organ donor and the consent rate is around 12%. In Austria, where you have to tick a box to ‘opt out’, the consent rate is over 95%. It’s called the status quo bias. A similar strategy from ‘opt in’ to ‘opt out’ resulted in the UK’s adoption of auto-enrolment with beneficial consequences.


Any last comments?Behavioural economics is relevant to everyone, it’s fascinating and fun, and above all don’t underestimate how much it could improve your business.

For further information, watch Paul's TEDx Talk on YouTube