When I started writing about all things financial over a decade ago, the topic of behavioural finance was usually dismissed with a chuckle and a wave. (Back then, Fama’s Efficient Market Theory still ruled the investment research roost.) Today, however, hardly a day goes by when a new piece of research on the topic doesn’t crop up. After all, in this age of razor thin investment returns, investors are open to new ideas that can help them break away from the herd.

Which is why I find Rossa O’Reilly’s article in this issue of The Analyst so interesting. In “Emotional Finance” he unpacks a fascinating new piece of research from CFA Institute, Fund Management: An Emotional Finance Perspective (CFA Institute Research Foundation, 2012). In it, authors David Tuckett, a professor in the Brain Sciences Faculty at University College London and Richard Taffler, a professor of Finance at the University of Warwick, pool their collective wisdom to craft a unique discussion of how psychoanalysis and emotional states can inform and even guide the practice of money management.

The bottom line: money management is undeniably ruled by emotions, whether it’s the stress of meeting clients’ expectations or the constant pressure to outperform peers. In pushing to constantly meet unrealistic expectations (phenomenal returns with low risk) fund managers can easily find themselves up against a distorting mirror that has the power to damage them emotionally and erode their confidence.

So what’s the answer? A reality check across the industry, according to Tuckett and Taffler, whereby money managers and clients take benchmark beating off the table and find a better way to define the value of what money managers do every day.

This CFA Institute paper shows how far we’ve come in just decade, as the Efficient Markets Theory gives way to less tangible (and arguably more realistic) ways to quantify performance in different markets. And in this uncertain post-2008 world that might just be a good thing.

On a final note: are you interested in writing for The Analyst? If so, contact us by emailing me at caroline.cakebread@rogers.com. We’re always looking for fresh ideas and new voices on the challenges and opportunities faced by CFA Society Toronto members and charterholders.