Mutual funds cannot consistently return better-than-average performance. Yet investors often pick their mutual funds based on past performance. Researchers Leonardo Weiss-Cohen, Philip Newall and Peter Ayton conducted a long-term Think Forward Initiative research project that sought to answer how their investment decisions could be improved.
A common interpretation in behavioural finance is that rationality is the result of a pure cognitive process which can be behaviourally biased. While cognitive biases are influences that affect rationality from within the cognitive system, affective biases refer to those influences that affect the cognitive system from outside. Unfortunately, the assumption that rationality is a pure cognitive process is not well motivated. Rationality results from the intrinsic interaction between cognition and emotions.
