Behavioral Finance at Jpmorgan

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N9-207-084
JANUARY 18, 2007

MALCOLM BAKER ALDO SESIA JR.

Behavioral Finance at JPMorgan
Behavioral finance is the study of how investors make decisions—and how these decisions affect stock prices and broad market movements. Investors are human, and humans aren’t perfectly rational. When they buy on emotion, they not only jeopardize their own investment plans, but also create opportunities for others in the market.1 In the three years since a 2003 launch in the United States, JPMorgan’s behavioral finance products had attracted new assets at a rapid pace. The Asset Management unit at JPMorgan had been a pioneer in what it termed “Behavioral Investing.” It had over a decade of experience since 1992 when it offered an initial retail product in the United Kingdom.2 In the late 1990s, JPMorgan offered a wider range of mutual funds in the U.K. and Europe, and began to focus its efforts on the larger U.S. market. On the investment side, Chris Complin, chief investment officer (CIO) for behavioral finance products globally, had all five new products in the top 20% of their Lipper categories.3 This provided confirmation for a concept that’s been successfully applied internationally. On the business side of the Asset Management unit, Richard Chambers, the head of U.S. and European marketing, had given investor psychology a central role in the branding of the new funds. The idea that well documented behavioral biases could create opportunities for JPMorgan’s investment managers seemed to resonate with retail investors.

FOR FINANCIAL PROFESSIONAL USE ONLY / NOT FOR PUBLIC DISTRIBUTION

1 JPMorgan Asset Management, Behavioral Finance Strategies: What It Means to Invest in JPMorgan Intrepid Funds. 2 Founded by academics in the early 1990s, LSV Asset Management and Fuller and Thaler Asset Management also had a

distinctly behavioral finance approach. Fuller and Thaler funds were distributed by JPMorgan under their Undiscovered Managers brand. However, most of their assets under management were from institutions, not retail investors and brokers, such as Merrill Lynch and Smith Barney. The Dreman funds, distributed by DWS Scudder, were the main retail competition in the United States., with large, mid-cap, and small value fund offerings. Many other asset managers, while not appealing explicitly to behavioral finance, nonetheless appealed to investor psychology as a basis for generating above average returns or used quantitative strategies, grounded in investor underreaction and overreaction to information. 3 This performance was for the most recent 1-year and 3-year periods. Source: JPMorgan, Intrepid Strategies: Second Quarter 2006. ________________________________________________________________________________________________________________ Professor Malcolm Baker and Research Associate Aldo Sesia, Jr. of the Global Research Group prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2006 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

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Behavioral Finance at JP Morgan

Competing asset managers used similar investing principles, but few had gone as far in embracing psychology and behavioral finance in the retail market. So far, JPMorgan’s approach had been successful. By the third quarter of 2006, total assets under management in U.S. funds had risen from $100 million in the first quarter of 2003 to over $20...
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