Modeling the Relationship between Cognitive Abilities and Portfolio Managers' Investment Performance: Emphasizing Dimensions of Cognitive Bias

ObjectiveThe purpose of this paper is to model the relationship between cognitive abilities and portfolio returns for portfolio managers and investors, with a focus on the dimensions of cognitive bias. The problem addressed in this study is to investigate the effectiveness of decision-making behavior among portfolio managers in the capital market of Iran, based on the dimensions of persistence and representation of cognitive bias in investors. MethodsThis study employs an applied research approach with a descriptive objective. Data collection was conducted using a series of tests, including the Cognitive Reflection Test (CRT), where one question (Linda's problem) was utilized to assess communication sophistication bias, and two additional questions were used to evaluate anchor bias. Gerter’s (1992) test was applied to measure long-term bias, while an imagery-based task (a guessing game involving a ball and bag) was administered to a sample of 30 managers from various companies. Additionally, a questionnaire containing 15 questions was given to 302 capital market professionals, including investment managers, analysts, and traders who worked in portfolio management companies and were selected as a statistical sample. The questionnaire included questions about decision-making power, investment activities, organizational position, yield of the past year, and investment strategies. To analyze the data and test the hypotheses, the chi-square test, Mann-Whitney test, and probit regression model were used. ResultsThe results showed that a one-unit increase in the decision-making criteria of portfolio management experts leads to a 0.27% increase in investment return. Additionally, the level of cognitive ability and decision-making skills of males and females showed a significant difference, and the level of cognitive ability and decision-making skills of basket operators with different efficiency levels also showed a considerable difference. Furthermore, the results indicated that 40.4% of the participants in the research have high cognitive ability. However, the criteria introduced for cognitive bias, such as representational bias and procrastination, harmed investment returns. ConclusionThis study evaluated the dimensions of lingering bias, typology, reliance and adjustment, and sophistication in the decision-making of experts. The results showed that the criteria of cognitive ability and decision-making power of expert portfolio managers had a positive and significant effect on investment performance. An increase in the level of cognitive ability leads to an increase in performance by 0.53%, and a one-unit increase in the decision criteria of portfolio management experts leads to a 0.27% increase in investment return. However, the criteria introduced for cognitive bias, such as representational bias and procrastination, hurt investment returns.