The test recognised that all individuals, when making decisions, use a combination of two brain processes, which he labelled system 1 and system 2. Yale School of Management’s professor of Marketing, Shane Frederick, devised the Cognitive Reflection Test (CRT) – a set of three simple questions designed to assess the specific cognitive ability that relates to decision-making. The fact that the vast majority of actively managed funds do worse than a passive equivalent suggests that the average fund manager may actually be hardwired to make poor decisions. The performance of a fund, after all, or any investment portfolio for that matter, is the result of a series of buy and sell decisions. To varying degrees, these sins, Montier argued, were responsible for the poor decision-making that can often lead to unhappy returns.
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January 2023
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