Anxiety Adjusted Returns Behaviouralising Finance Greg B Davies, PhD Head of Behavioural Finance May 2013 Unrestricted distribution

2

If you bought in 1975 and sold in 1995, your average annual return would have been 12% <-5% -5% to 0% 0 to 5% 5 to 10% 10 to 15% >15% MSCI World Equity Annualised Returns Past performance is not a reliable indicator of future results Source: MSCI World Index, August 2011, Barclays Wealth Sell date, quarterly Buy date, quarterly

Zone of Anxiety Sell date, quarterly Buy date, quarterly No nominal losses over any holding period of 12 years or more MSCI World Equity Annualised Returns Past performance is not a reliable indicator of future results Source: MSCI World Index, August 2011, Barclays Wealth <-5% -5% to 0% 0 to 5% 5 to 10% 10 to 15% >15%

Framing horizon Past performance is not a reliable indicator of future results The experience we should base decisions on Source: MSCI World Index, August 2011, Barclays Wealth

Framing horizon Past performance is not a reliable indicator of future results The experience we do base decisions on Source: MSCI World Index, August 2011, Barclays Wealth

7 Modern Portfolio Theory – the standard model Portfolio Efficient Frontier Risk/Return Trade-off (Indifference Curve) Expected Returns

8 Utility Perceived Value A completely rational, risk-averse, investor… Long-term Objectives

9 A completely rational, risk-averse, investor… Short-term BiasesLong-term ObjectivesBehaviour Losses (%) Gains (%) Perceived Value Utility Perceived Value Losses (%) Gains (%) Utility

10 Adding anxiety… Losses (%) Gains (%) Perceived Value Utility Perceived Value Losses (%) Gains (%) Utility Short-term BiasesLong-term ObjectivesBehaviour

Anxiety leads investors to reject beneficial investments Risk free return Risk Compensation Expected Returns Risk Risk plus Anxiety Compensation Falsely Reject Accept Reject Anxiety Compensation

12 Fine-tuning the individual solution Risk Attitudes Decision Style COMPOSURE BELIEF IN SKILL RISK TOLERANCE MARKET ENGAGEMENT PERCEIVED FINANCIAL EXPERTISE DESIRE FOR DELEGATION COMPOSURE BELIEF IN SKILL RISK TOLERANCE MARKET ENGAGEMENT PERCEIVED FINANCIAL EXPERTISE DESIRE FOR DELEGATION ? ? Mr. Jones Mrs. Jones Moderate Risk Tolerance

13 Buy emotional comfort the easy (and expensive) way Portfolio Return Time

14 Portfolio Return Time Reluctance Buy emotional comfort the easy (and expensive) way

15 The journey matters! Portfolio Return Time Danger of selling low Danger of buying high Behaviour Gap

16 The journey matters! Buying Emotional Insurance through Smoothing Portfolio Return Time Emotional Insurance Behaviour Gap

17 Maximising Anxiety Adjusted Returns Portfolio Efficient Frontier Expected Returns

Contact InvestmentPhilosophy.net Unrestricted distribution

19 Which investor is happiest at the end? Portfolio Return Time A)Blue line B)Black line C)Orange line D)None/all

20 The traditional asset allocation solution Moderate Risk Tolerance Risk Attitudes Decision Style COMPOSURE BELIEF IN SKILL RISK TOLERANCE MARKET ENGAGEMENT PERCEIVED FINANCIAL EXPERTISE DESIRE FOR DELEGATION COMPOSURE BELIEF IN SKILL RISK TOLERANCE MARKET ENGAGEMENT PERCEIVED FINANCIAL EXPERTISE DESIRE FOR DELEGATION Mr. Jones Mrs. Jones

21 Exuberance Reluctance Denial Excitement Optimism Panic Fear Despondency Desperation Capitulation Reluctance Depression Apathy Indifference Cycle of investment emotions

22 Reluctance: waiting for the right moment Source: FactSet, Bloomberg, Merrill Lynch and Barclays.

23 CategoryActionReluctanceBehaviour Gap Education ++ Constraints Lock in to low liquidity assets--+ Risk targeting Reduce Risk++ Smoothing++++ Downside defence+++++ Phased investment++ Involvement Discretionary management++++ Advice++ Reduce information frequency/detail+++ Trading-off efficiency Increase liquidity++ Familiarity bias+++ Deliberate action bias++ Management style Active versus passive++ Strategic versus tactical++ Investing framework +++ Reducing anxiety

Financial framing – instability of risk preferences 24 Alternative X  Lose $4,000 Alternative Y  1/3 chance nothing lost  2/3 chance $6,000 lost 67% go for X Alternative A  Recover $2,000 Alternative B  1/3 chance $6,000 recovered  2/3 nothing recovered 92% go for A Would you choose A or B? Source: Wang, 1996 Imagine you bought $6,000 worth of stock from a now bankrupt company There are two alternatives to recover money… Would you choose X or Y? 24

25

Disclaimer This document has been issued and approved by Barclays Bank PLC. Although information in this document has been obtained from sources believed to be reliable, we do not represent or warrant its accuracy, and such information may be incomplete or condensed. This document does not constitute a prospectus, offer, invitation or solicitation to buy or sell securities and is not intended to provide the sole basis for any evaluation of the securities or any other instrument, which may be discussed in it. All estimates and opinions included in this document constitute our judgement as of the date of the document and may be subject to change without notice. This document is not a personal recommendation and you should consider whether you can rely upon any opinion or statement contained in this document without seeking further advice tailored for your own circumstances. This document is confidential and is being submitted to selected recipients only. It may not be reproduced or disclosed (in whole or in part) to any other person without our prior written permission. Law or regulation in certain countries may restrict the manner of distribution of this document and persons who come into possession of this document are required to inform themselves of and observe such restrictions. We or our affiliates may have acted upon or have made use of material in this document prior to its publication. You should seek advice concerning any impact this investment may have on your personal tax position from your own tax adviser. Barclays offers wealth and investment management products and services to its clients through Barclays Bank PLC and its subsidiary companies.Barclays Bank PLC is registered in England and authorised and regulated by the Financial Services Authority. Registered number is and its registered office is 1 Churchill Place, London E14 5HP. © Barclays Bank PLC All rights reserved. Issued for companies including Barclays Bank PLC (Reg. No ), Barclays Stockbrokers Limited (Reg. No ), a member of the London Stock Exchange and PLUS, Barclays Sharedealing (Reg. No ), Barclays Bank Trust Company Limited (Reg. No ) and Gerrard Investment Management Limited (Reg No ), a member of the London Stock Exchange. All of these companies are registered in England and have their registered office at: 1 Churchill Place, London E14 5HP. All of these firms are authorised and regulated by the Financial Services Authority.