At Hillsdale, we believe that successful investing is easily measured and as such is more of a science than an art. We believe that a scientific approach to investment management based on quantitative methods, systematic observation and simulation and modeling, results in rational decision making. Consistently making rational decisions leads to superior investment results.

Successful investment managers understand that not every single portfolio decision will appear to be the result of "rational decision making". In fact, it is by focusing too closely on each "buy" and "sell" decision that many investment managers become unsuccessful. The secret is to develop a set of decision rules that when applied in a disciplined manner over time help to maintain an optimal portfolio.

Hillsdale Investment Management believes that there is only one question that an investor should ask of his/her prospective manager and that is: "What decision rules are you using?" Successful investors are aware that decision rules are necessary to overcome irrational behaviour. Some examples of irrational behaviour include:

1. Having inconsistent attitudes toward risk. Many investors are risk averse in gains and risk seeking in losses. They prefer a sure gain of $100 to a 50/50 chance of winning either $205 or nothing, and they prefer a 50/50 chance of losing $205 or nothing to a sure loss of $100. Many investors are willing to pay a premium both to obtain a sure gain and to avoid a sure loss. In combination, these actions lead to inferior choices and cause investors to choose sub-optimal portfolios.
2. Creating "mental accounts". Many investors distinguish paper losses from "realized losses". Because a stock with a paper loss might rise in price, the chance always exists that the mental account containing the stock will break even. A realized loss means admitting you were wrong and "kissing the hope of breaking even goodbye". Successful investment managers understand that the amount of gain or loss experienced while holding a security is irrelevant to the decision to sell. They understand that the true cost of not realizing a loss includes not only the loss already incurred, but the opportunity forgone by not purchasing another security. They learn to deal with the "pain of regret" in order to maintain their portfolio's optimal characteristics.
3. Being overconfident. Most investors are programmed to extract as much information as possible from what is available rather than to assess how little is known about a particular issue. They are optimistic. They overestimate both their degree of knowledge and the chances that they will succeed such that their confidence far exceeds their actual performance.

Successful investment managers understand that there are very few "true" experts. They allow for many revisions in their own predictions and those of others and spend as much time preparing for the unintended consequences of being wrong (ie. developing sell rules - how, when and why) as trying to be right.

At Hillsdale, our beliefs in investment philosophy tie directly into our Investment Process. We judiciously avoid emotional inputs, but consistently exploit such behavior when it is evident in the market. We maintain consistent attitudes towards risk, do not maintain mental accounts and are fully prepared to deal with unintended consequences. Importantly, we purposely spend less time looking for the next big winner than we spend on managing our existing portfolio because we understand that a successful portfolio manager must divide his/her time evenly between three critical functions - evaluating the existing portfolio, selling and buying - and that each is equally important within the portfolio management decision making process.

Based in part on proceedings of the AIMR seminar improving the Investment Decision Making Process:

Behavioural Finance and Decision Theory, April 1995
Tversky , Amos: "The Psychology of Decision Making"
Statman, Meir: "Behavioural Finance vs. Standard Finance"
Shaw, Leslie: "The Principal-Agent Relationship and Investment Decision Making"