Behavioural economist Priya Sundaram studies how cognitive bias affects institutional investment decisions. We asked her to walk through what the data actually shows.
The asymmetry businesses ignore
Kahneman and Tversky established that losses feel roughly twice as painful as equivalent gains feel rewarding. Sundaram says this asymmetry shows up clearly in corporate data. In a 2021 study of 400 North American firms, companies with recent portfolio losses were 2.3 times more likely to reduce equity exposure compared to firms with equivalent gains increasing it.
The response to loss was disproportionate to the actual risk change involved.
How this plays out in practice
Sundaram describes a pattern she calls defensive overcorrection. A firm experiences a 9% portfolio decline. The CFO, under board pressure, shifts 30% of holdings into cash equivalents. Twelve months later, the original positions have recovered and the cash position has returned almost nothing.
The decision felt responsible. The outcome was a measurable drag on returns.
What separates firms that avoid this
Sundaram points to pre-committed rebalancing schedules as the most effective structural fix. Firms that set calendar-based rebalancing intervals, rather than event-triggered ones, show significantly less performance drag from emotional decision timing. The schedule removes the moment of discretion where bias enters.
She is careful to note this does not eliminate risk. It eliminates one specific and well-documented source of avoidable underperformance.