The Pain Premium

In his new book The Behavioral Investor published late last year, Daniel Crosby says that for a premium to be broad and persistent an investor needs to feel a certain amount of pain to hold positions for any length of time.

“For [a premium] to be enduring, I think there needs to be a behavioural component to it,” Crosby, who holds a PhD in psychology and is also an executive director with United States-based wealth management firm Brinker Capital, says in an interview with [i3] Insights.

“You see that over time academics have unearthed all sorts of little anomalies: calendar effects and all sorts of trifling anomalies like that. Then there are papers published and it gets quickly arbitraged away because there’s no pain, and because there’s no pain there’s no premium [anymore].”

He argues some established investment strategies are not inherently riskier than holding broad market-cap portfolios, but look on paper quite uncomfortable because they tend to hold a bunch of quirky companies.