This week, I asked Anastasia Buyalskaya to guest author Macro Signposts. Dr. Buyalskaya is a behavioral finance advisor to PIMCO; she helps the firm incorporate behavioral science insights and methodologies into our investment process. In this edition, she shares observations on the structure and discussions of PIMCO's annual Secular Forum.

Unless explicitly stated, views expressed do not constitute official PIMCO views.

PIMCO's Secular Forum Process: A Behavioral Science Perspective

By Anastasia Buyalskaya, Ph.D. – advisor to PIMCO on behavioral finance

Last week, PIMCO held its annual Secular Forum: Investment professionals from around the world gathered to debate the state of the global economy and to identify structural changes and trends likely to have long-term investment implications. The firm also invited guest speakers, experts from several fields who brought valuable, multidimensional perspectives to the discussions. PIMCO will share the key conclusions and investment takeaways from this year's forum in its Secular Outlook in early June.

In its wide-reaching forum debates, PIMCO applies best practices from behavioral science in an effort to maximize the interchange of ideas, challenge assumptions, counter cognitive biases, and generate robust insights. At last week's forum, three observations stood out from a behavioral science perspective.

The presentations and discussions with guest speakers were structured in an effort to minimize authority bias, which is the tendency to overweight and defer to the opinions of a presumed expert or authority on a particular topic. After all, these individuals' expertise and presumed information edge are the basis for their invitation to the forum. Nonetheless it is important to evaluate their views objectively, however compelling those perspectives may seem. The structure of PIMCO's Secular Forum enabled participants to challenge authority bias and ensure a balanced debate: Most sessions featured more than one expert sharing and debating alternate views on a particular topic, often with a PIMCO moderator who brought additional perspective. This structure is valuable since even authorities, however esteemed, are still subject to cognitive biases.

A related observation is that it can be difficult to translate a compelling narrative around macro or market trends into a concrete, specific forecast. Some experts appeared reluctant to do so even when pressed to assign a numeric probability around, for example, the likelihood of recession, or the outlook for the U.S. dollar. Though studies have shown that it is possible to assign numeric probabilities to even complex geopolitical events, the hesitation is natural, especially when the stakes are high. In line with best practice, PIMCO investment professionals at the forum presented concrete macro scenarios with probabilities attached as a basis for discussion. Assigning probabilities to various possible outcomes can help the firm develop a well-vetted long-term forecast, but it's important to assess those probabilities critically. Probabilistic reasoning can be prone to error: Suppose, for example, five independent experts assert their belief that some binary future event will occur within the next three years. The five identical predictions would have more signal value if they are based on uncorrelated information than if they are all based on the same report. Confidence intervals matter too: When saying "yes," is the individual 51% confident or 95%? All of this should be taken into account when uniting around a final firm view.

Finally, one of the ultimate objectives of PIMCO's forum process is to translate macro and market forecasts into investment strategies and positions. However, PIMCO remains mindful of the risk of action bias. A geopolitical event, a market surprise, or a data release that's far from consensus expectations may inspire investors to make swift and potentially major changes to a portfolio because they feel compelled to take action, any action, rather than wait and watch. Similarly, investment professionals develop compelling macro forecasts during the Secular Forum and may be tempted to quickly translate those into positioning. PIMCO recognizes, however, that the secular time horizon is over a period of years, not weeks, and not all implications or forecasts necessarily call for an immediate change to positioning. That said, while the information is fresh in investors' minds, it is useful to plan ahead: establishing scenarios and setting decision thresholds associated with macroeconomic milestones in order to be better prepared when the time comes to take action.

For more insights, please read PIMCO's Viewpoint, "The Human Factor: Using Behavioral Science to Improve Investment Decisions."

This report, like future reports, summarizes the vast array of data analysis that we do at PIMCO. Please don't hesitate to ask us about the underlying data and analysis. If you would like to reach out, please email [email protected].

IMPORTANT NOTICE
This communication contains the current opinion of the author, but not necessarily those of PIMCO and such opinions are subject to change without notice.

All investments contain risk and may lose value.

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision. Outlook and strategies are subject to change without notice.

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