Investment Strategy
Thorpe Abbotts looks for situations where crowd behavior causes systematic behavioral bias and human misjudgment has led market expectations too far astray from reality. We believe these situations generate asymmetric risk/reward investment opportunities.
While the future is inherently uncertain, the presence of human biases is not uncertain. It is an ever-present feature in markets. At Thorpe Abbotts, we have created a strategy that harnesses proprietary behavioral models to exploit these biases.
Behavioral Finance
We use a behavioral economics approach to investing with a basis in both quantitative and qualitative analysis
Behavioral finance lies at the intersection of psychology and finance.
Behavioral finance recognizes that human psychology often conflicts with the rational agent model employed by financial theorists. It recognizes that humans are not always the perfectly rational, optimizing machines required by efficient market theory. In this sense, it tries to explain how financial markets actually work, not how they should work.
Behavioral finance is the lifeblood at Thorpe Abbotts Capital. At a fundamental level, it drives everything we do—how we search for ideas, research and evaluate them, and, most importantly, how we select ideas and manage our portfolio. At our core, we are contrarians, generating alpha by exploiting other investors’ mistakes.
Crowd Wisdom
Market efficiency relies on the idea of crowd wisdom
The idea that crowds are wiser than the individuals they comprise is a fundamental component of efficient markets. When diversity is lost and individual views converge, crowd wisdom may become crowd madness. This is where the best investment opportunities can be found.
Thorpe Abbotts actively searches for situations where systematic behavioral bias has taken hold of the market’s judgment. Our strategy is simple: Look for mispriced opportunities by searching for situations where correlated errors skew the crowd’s judgment.
The Mispricing Opportunity
Our investment process starts with a proprietary search algorithm designed to find systematic behavioral bias
We don’t start with a blank page. We start with a list of the most likely systematic mispricings in the market and use fundamental work to distinguish mispricing from market efficiency. Our algorithm gives us a signal of potential behavioral mispricing that we must confirm or disconfirm. We spend less time searching for ideas and more time finding the identifying factors that have caused behavioral misjudgment.
“The madness of crowds comes from like-minded people who are all wrong.”
Scott Page