Do investors know what will make them happy?

That is the question posed in a new research article by myself, Christoph Merkle, and Greg Davies:

We study investor happiness in a panel survey of brokerage clients at a UK bank. When investors formulate expectations about future happiness, they set their aspirations depending on own portfolio risk levels, used benchmarks, investment horizon, overconfidence, and other individual characteristics. They are very accurate in their forecasts, only rarely are investors unsatisfied with an outcome they predicted to be happy with, and vice versa. However, the determinants of ex-post satisfaction only partially correspond to the ones found for expected happiness. In particular, relative performance plays an important role, as having outperformed other people contributes to investor happiness, as does active trading.

This research helps us understand the motivations for trading to try to beat a benchmark, as opposed to investing for the long term. Relative outcomes play a large role in happiness, and thus pursuing outperformance can seem rational. But if you are move likely to underperform than over-perform, perhaps ex-post (after the fact), you won’t be.