Investors Behaving Irrationally

Retail and institutional investors are exhibiting behavior that appears to be at odds with their investment goals, a study found.

Investors are not acting in their best interests as they are becoming more aware of economic instability and misaligned interests amongst investment providers, government and markets, according to a study by the State Street Center for Applied Research. As a result, their investment decisions do not always match their stated goals, and there is ample aggregate evidence of this behavior.   

Institutional investors are faced with challenges in navigating the complexity of certain asset classes. Low-yield markets have increased institutional investors’ appetite for alternative strategies, yet the majority admits the greatest challenge is not having a deep enough understanding of these assets. 

In addition, according to the study, retail investors’ conservative strategies are cracking their retirement nest eggs.When retail investors were asked what steps needed to be taken over the next ten years to retire, the majority said to invest more aggressively, yet cash is their number-one allocation now and is expected to remain number one over the next decade.



Against this backdrop of investor disconnect between behavior and goals, the study found that investors identified performance as the most important metric for determining the value of their investment providers as well as the greatest weakness of their investment providers.  

Accordingly, the study revealed that when it comes to performance, one size no longer fits all. “Current monolithic benchmarks based on relative performance to peer groups or indices serve the provider,” said Suzanne Duncan, global head of research for the Center for Applied Research. “The investor’s view of value is now more complex and reflects his/her own personal blend of strategies and objectives. In today’s investment reality, the investor is the benchmark when it comes to defining performance.”   

The study also found that investors’ seemingly irrational behavior is actually a rational response to a number of factors impacting the current global investment environment:  

  • Major economic trends, including a steady increase of national debt worldwide, tighter correlations across global markets and a rise in systemic risk;  
  • Mistrust of their primary investment provider to act in their best interest, stemming in part from lack of value delivered versus fees charged—only one-third of investors believe their primary investment provider is acting in their best interest; and  
  • Impediments from politics as well as new financial regulation that most investors believe will be ineffective and expensive. Sixty-four percent of investors believe that regulation will not help address current problems, and 62% believe the cost will be passed on to them. 

The study was based on input from more than 3,300 investment management industry participants across 68 countries. The study report, “The Influential Investor: How Investor Behavior is Redefining Performance,” is available at