A Method for Identifying and Correcting Behavioural Deviations in Investment Decision-Making

Abstract

Investment committees rarely record why they decided what they decided. That gap makes behavioural deviations invisible and therefore uncorrectable. This paper builds a four-stage method that turns such deviations into measurable quantities and then reduces them. Each of the four biases receives an operational test with a numerical threshold, so a decision either passes or fails rather than attracting a subjective label. Diagnostic work on 412 documented committee decisions taken between 2019 and 2024 found behavioural distortion in 41.2 per cent of cases. A twelve-month pilot of the correction protocol lowered that share to 29.1 per cent. Portfolio turnover fell from 118 to 79 per cent a year, and the realized Sharpe ratio improved by 0.18. Structured decision templates delivered the largest single gain, and the protocol proved robust across subsamples.