Postulates and data for the model of Trust Investment Behavior

Since our model is a theory of individual decision-making behavior, the method of analysis is based on the theory of human problem solving. 4 In keeping with the postulates of this theory, the main postulates for the analysis of the investment decision process are that there exist:

  1. A memory that contains lists of industries each of which has a list of companies associated with it. The memory also contains information associated with the general economy, industries, and individual companies.
  2. Search and selection procedures that perform the task of searching the lists of information stored in memory, selecting those items that have the required attributes, regrouping the selected items of information into new lists, and performing algebraic operations when necessary. These procedures function like a clerk who prepares lists of stocks suitable for current investment by scanning a master list.
  3. A set of rules or criteria that guide the decision making by stipulating when and how each decision process is to be The set of rules constitutes the structure of the decision processes for an individual investor. It might be compared to the “rules of thumb” of the traditional “expert,” but there is an important difference — namely, the set of rules must be defined unambiguously.

In common with other problem-solving programs, the processes are used iteratively and recursively. Lists of industries and companies are searched for particular attributes; sublists are created, searched, and divided again. For example, to obtain a high growth portfolio, the list of companies stored in memory is searched to obtain securities with the desired characteristics. Additional criteria are employed to narrow (or expand) this list. Further search and testing against desired criteria yields the specific selection of stocks to buy.

Like the investor it simulates, the program stores the final result (list) for future use. If the same problem recurs, the entire process need not be repeated. The list may be judged by present criteria, accepted, adapted to meet new conditions, or completely rejected. In the latter event the program would renew search and selection activity until a new list had been formed.

To define a model of trust investment behavior within this general framework, we require the basic rules (operations) used in making a decision to purchase particular securities. To obtain these data, trust departments of several local banks were studied by interviewing departmental officers and by observing behavior  at committee meetings called to review past and future decisions. Attention was then focused on an investment officer who was chiefly responsible for all decisions on the choice of portfolios within a particular bank. The histories of several accounts were examined and naive behavioral models were constructed to help uncover those decision processes that appeared to be invariant among accounts.

In an attempt to confirm or refute these hypotheses, the trust officer was asked to permit “protocols” to be made of his decision processes. The protocols recorded the trust officer’s decision processes for accounts that arose in the course of his work. The decisions made during those problem sessions determined the particular securities that were purchased for these accounts.

Close inspection of the protocols revealed that many of the decisions pertaining to the formulation of expectations and the evaluation of industries, companies, and stocks were made before the selection of a particular portfolio began. In an attempt to discover how these prior decisions were made, a new approach was taken. The trust officer was asked to read articles from  financial journals and analysts’ reports to which he subscribed and to comment on the ideas, forecasts, facts, and so forth presented in these articles. Protocols of these thought processes were more successful, for the reason that they revealed many of the decision processes subsumed in the earlier transcripts.

On the basis of these data and analytic techniques, a model was constructed. The model considers the problem of investing the funds of new accounts in common stocks. It does not directly consider the problem  of allocating the funds among bonds, preferreds, and common stocks. The trust investment model is stated in terms of a computer model, which is presented in the next section.

Source: Skyttner Lars (2006), General Systems Theory: Problems, Perspectives, Practice, Wspc, 2nd Edition.

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