Even the most rational fund managers rely on emotion when investing and many are so attached to certain stocks that they speak of them 'as if they were lovers', according to academics who interviewed 50 professionals in the US, UK, France and Asia.
Professional fund managers are, in fact, no less emotional about the stocks they pick than the average person – a result that challenges the idea that fund managers have a specialist advantage when it comes to picking stocks, say the academics.
“Although most of the fund managers we interviewed saw part of their particular competitive advantage as remaining, as they described it, unemotional or rational, in practice they were just as emotional as anyone else when they started to talk about the stocks they had invested in,” says Richard Taffler, professor of finance and accounting at Warwick Business School, who co-wrote Fund Management: An Emotional Finance Perspective.
“There were lots of examples where they referred to [stocks] almost as if they were lovers.”
To deal with the anxiety of making investment decisions, fund managers rely on story telling to create a narrative that explains why particular stocks are likely to succeed, says Taffler. These narratives may be reinforced in various ways. The authors discuss how a fund manager who invested in a fast-food company would visit the company's restaurants and watch customers ordering meals.
“The story was about seeing something nobody else could see, and that feeling gave him the confidence to invest,” says Taffler.
The authors do not suggest that fund managers should strive to be completely unemotional, which would in any case be impossible. However, the conclusions may be unsettling to those familiar with psychological research that suggests emotion and story telling can lead to biased decision making. For instance, it has been shown that people tend to disregard information that runs counter to a favoured narrative while overemphasising data that supports it. The psychologist Daniel Kahneman won the Nobel Memorial Prize in Economic Sciences in 2002 for research on this subject.
Taffler suggests difficulties in grasping the role of emotion in fund management may stem from unrealistic expectations about the very nature of fund management.
“The whole environment is problematic, because fund managers are expected to outperform on a continuous basis, in competition with other equally able and well-resourced managers, and of course not everyone can do this,” he says.
“In emotional-finance terms an important part of the fund manager's job is to defeat uncertainty,” he adds. “In a sense we've got an institutional structure which seeks to deny that ultimately we're all working in an environment that is inherently unpredictable.”
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