Managing risk is forever at the top of the list for informed investing, but the biggest challenge on this front arises from within. As Pogo famously said, “We have met the enemy and he is us.”

So-called behavioral risk comes to mind after reading a recent survey of risk preferences, which reminds that investor perception on risk casts a long shadow on choices for asset allocation and, by extension, portfolio returns. Perhaps the most surprising result is that individual investors tend to think about risk is starkly different terms vs. financial advisors and institutional investors. Not surprisingly, these preferences have real-world results.

“Each of these groups has its own risk preferences and behavioral characteristics that guide investment decisions,” notes “Measuring Risk Preferences and Asset-Allocation Decisions: A Global Survey Analysis,” a recent study by Andrew Lo (a finance professor at MIT) and two co-authors. The results are based on polling more than 22,000 individuals, nearly 5,000 advisors, and 2,000-plus institutional investors for the three years through 2017. The “goal is to understand how different market participants and different types of individuals compare along the dimensions of risk aversion and asset allocation,” Lo and company explain.

One of the key findings: “we find that most financial advisors and institutional investors employ a contrarian allocation strategy — that is, they change equity allocation in the direction opposite to recent returns on the S&P 500.” Those preferences diverge against “the overall behavior of individual investors, who on average are extrapolators.” In other words, individual investors tend to use past performance as a forecast for thinking about equity market allocations.

The past isn’t irrelevant, of course. In fact, sometimes it deserves to be the dominant factor for developing expected returns. But not always. In addition, the lens you employ to study the past is also important. Valuations and other non-performance metrics can be more valuable at times vs. returns.

In any case, allowing recent performance data to dominate your investment outlook has a troubled history. Unfortunately, a sizable portion of individuals appear to swim in these troubled waters.  

This is clear in the answers to the question: How would you change equity allocation following a 10% to 20% decline in the stock market (S&P 500). Individuals favored doing nothing or trimming equity weights. By contrast, answers from advisors and institutional investors skewed toward standing pat or increasing allocation.

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Turning the question on its head is no less revealing. How would you change equity allocation after the S&P 500 rises 10% to 20%? Individuals revealed a modestly biased preference to do nothing or raise equity weight while advisors and institutions are more inclined to pare the allocation.

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What explains the differences? Several possibilities are offered, including: “The contrarian behavior of financial advisors may also be explained by long-term investment objectives, which are typically planned to maintain a target asset mix over several years.”

If nothing else, the survey data help explain why long-term investment results can vary by a wide degree for different investors with seemingly similar long-run wealth-creation objectives. The study also provides data for understanding why positive alpha (market-beating performance) is a zero-sum game. Earning above-average results may be linked to skill (at least some of the time), but it’s also a byproduct of the fact that someone’s trailing the benchmarks.

No wonder that most individual investors earn mediocre returns at best over time, as a recent Dalbar study reports. Summarizing the consultancy’s report, The New York Times notes that “the average mutual fund investor has underperformed the markets for both stocks and bonds” over the trailing five-, ten-, 20- and 30-year periods. “Bond investors have generally failed to even keep up with inflation.”

Surprising? Sure, although what’s even more shocking is that the individuals generally seem incapable of learning from past mistakes. Therein lies the key reason why a select few investors are able to generate above-average returns.