Keynote Presentation: “Choice under Uncertainty: The Psychology of the Individual Investor," by Daniel Kahneman

Professor Kahneman’s keynote address outlined key evidence discovered in his and Amos Tversky’s investigation of how people manage risk and uncertainty. Kahneman detailed his theory of behavioral finance and its effect on the rational decision-making process. He offered explanations as to why people tend to irrationally hold their weak investments and sell their strong ones.

Three key reasons for failure in decision making:

1.     Bold forecasts – Optimistic bias, illusion of control, and competitive neglect cause people to assign a higher probability of good happening to themselves, to overexaggerate their skills, and to underestimate the uncertainty in the world.

2.     Narrow framing of decisions – Thinking too small and framing overly narrowly cause people to make timid decisions and become risk averse.

3.     Loss aversion – Extreme imbalance in the way people think about gains and losses causes people to hold bad investments too long and sell profitable ones too early.

Professor Kahneman explained that many people are influenced by the disposition effect – that is, they sell their winners and keep their losers. By keeping poorly performing investments, optimists avoid acknowledging certain financial loss and continue the gamble. They become loss-averse. 

The success of financial organizations to control loss aversion, optimism, and overconfidence is determined by the institution’s ability to achieve control over biases that are highly characteristic of individuals.

Panel: “Behavioral Finance, Market Efficiency and Decision Making: Lessons from Master Investors,” with Paul Tudor Jones, Julian H. Robertson Jr., John Griffin, and Daniel Kahneman

After Professor Kahneman’s keynote address, a panel of extraordinary investors and decision makers described their experience in avoiding behavioral traps and suggested the most appropriate decision practices. The session included Paul Tudor Jones (A&S ’76), renowned Wall Street trader and Founder and Chairman of Tudor Group of Companies; Julian H. Robertson Jr., a key figure in the hedge fund industry’s evolution and Founder and Chairman of legendary Tiger Management; and Professor Kahneman. McIntire’s own legendary investor, John Griffin (McIntire ’85), President and Founder of Blue Ridge Capital and Visiting Scholar of Finance, moderated the discussion.

The discussion included each investor’s insight into risk management as the key to successful investment management. The key is to analyze risk versus reward while eliminating the extraneous psychological factors that affect that evaluation. Jones suggested that "the trick is to make sure that you’re alive with enough capital to exploit those few times when you actually may know something and may have some insight."

Panel: “Corporate Strategy and Governance: Balancing Intuitive and Analytic Approaches to Decision Making,” with Bill Shenkir, David B. Patteson,  Jeffrey C. Walker, and Charles H. Turner

The third session considered opportunities to balance intuitive and analytic approaches to decision making and behavioral issues associated with corporate governance. The panel  included David B. Patteson, President and CEO of Biotage Inc. and Executive Vice President of Dyax; Charles H. Turner (McIntire ’79), Executive Vice President and CFO of Pier 1 Imports; and Jeffrey C. Walker (McIntire ’77), Managing Partner of JPMorgan Partners and Vice Chairman of JPMorgan Chase. McIntire’s Bill Shenkir, William Stamps Farish Professor of Free Enterprise and co-author of Enterprise Risk Management, moderated this discussion.

While the panel discussed strategic decision-making processes in corporate governance, factors such as strong board composition and transparent financial reporting were seen as key components of risk management. These factors help ensure that companies operate in a way that is not only legal, but ethical. Panelists agreed that the essential qualities for leadership at the executive level include:

• Optimism

• Flexibility

• Integrity

• Well-roundedness

Presentation: “The Essence of Decision: Foreign Policy Choices under Uncertainty,” with Philip Zelikow

In the afternoon session, Philip Zelikow, White Burkett Miller Professor of History and Director of the University of Virginia’s Miller Center of Public Affairs, assessed the difficulties inherent in understanding and forecasting outcomes of crucial foreign policy decisions 

During his afternoon address, Zelikow pointed out that cognitive abilities, reading comprehension, and other hallmarks of intelligence don’t necessarily equate with the kind of judgment vital to success in business or in the foreign policy arena.

“Perhaps there is nothing more dangerous than high intelligence wedded to bad judgment,” he said, “because the high intelligence erases humility and gives a person license to express opinions that appear to be erudite. But without being wedded to good judgment that may be the most dangerous thing of all.”

In contrast, he pointed out that “judgment is that elusive ingredient that every executive seeks when he buys the latest leadership secrets book.” Zelikow suggested that good judgment, either in the business or policy arenas, includes an elusive set of qualities all working together. These qualities include a sense of values, the ability to create a workable strategy—sometimes in the midst of chaos—and the kind of character that includes the ability to make difficult decisions while remaining curious and empathic. Although many driven and intelligent leaders may not possess the qualities vital to excellent decision making, Zelikow pointed out that “you will find very good judgment in people who may not have a high SAT score.”

Panel: “Foreign Policy Choices, Information, and Crisis Situations: Making Sense of Complex Realities,” with Douglas MacEachin, William B. Quandt, Richard Betts, and Philip Zelikow