What matters to investment professionals in decision making? The role of soft factors in stock selection

Much effort has been devoted by both academics and practitioners to understanding which factors drive share prices. Nevertheless, there are still sharp moves in stock markets that are difficult to explain. Obviously, factors that are hard or impossible to measure and subject to interpretation, are relevant for moving share prices, as well. However, there seems to be little research on how important these so-called soft factors actually are for investment professionals in their decision-making process. Likewise, there is fairly little empirical knowledge on which of them are deemed most important. The data assessed for this thesis are based on a survey among investment professionals and hence contribute to the limited body of literature drawing on empirical polls. The survey data analysis shows that soft factors are contributing nearly 50% to the decision making of an investment professional. There are some indications that this proportion is understated. As suspected, the actual decision making by investment professionals is not consistent with the efficient market hypothesis, but we find some support that sensemaking plays a role. Though the description used for soft factors in the thesis is accepted by the survey participants, the lack of a standard definition poses an issue. Soft factors that stand out as particular important according to the survey are conviction and reputation. The latter is clearly driven by management quality and strategy. Another aspect that emerged as an important factor is the business model. Though rather seen as a hard factor, it seems to include a considerable soft component. We also note the role that trust is playing in the actual decision making of market participants. On the other hand, environmental or social aspects are seen as hardly relevant by survey participants and as not helpful in mitigating risk. Corporate governance only matters in its most "capitalistic" interpretation to the investment professionals. On the face of it, the survey data would suggest a mostly rational approach to decision making. However, there are a number of findings that raise doubts about this conclusion.