Evaluating the quality of investment products: can expert judgment outsmart the market?

Abstract

Purpose This paper aims to deal with expert judgment and its predictive ability in the context of investment funds. The judgmental ratings awarder with a large set of experts was compared to a sample of the dynamic investment funds operating in Central and Eastern Europe with their objective performance, both past and future, relatively to the time of the forecast. Design/methodology/approach Data on the survey sample enabled the authors to evaluate both ex post judgmental validity, i.e. how the experts reflected the previous performance of funds, and ex ante predictive accuracy, i.e. how well their judgments estimated the future performance of the fund. For this purpose, logistic regression for past values estimations and linear model for future values estimations was used. Findings It was found that the experts (independent academicians, senior bank specialists and senior financial advisors) were only able to successfully reflect past annual returns of a five-year period, failing to reflect costs and annual volatility and, mainly, failing to predict any of the indicators on the same five-year horizon. Practical implications The outcomes of this paper confirm that expert judgment should be used with caution in the context of financial markets and mainly in situations when domain knowledge is applicable. Procedures incorporating judgmental evaluations, such as individual investment advice, should be thoroughly reviewed in terms of client value-added, to eliminate potential anchoring bias. Originality/value This paper sheds new light on the quality and nature of individual judgment produced by financial experts. These are prevalent in many situations influencing clients’ decision-making, be it financial advice or multiple product contests. As such, our findings underline the need of scepticism when these judgments are taken into account.