How self-awareness can help fund managers make better decisions

Rather than being unemotional, experts say the best performers are aware of their responses and behaviours

How self-awareness can help fund managers make better decisions

Fund managers are expected to be critical thinkers, analyzing different investment options and seeing how that would fit into and weigh on the portfolios they run. But more industry insiders and experts are recognizing that managers’ critical thinking should extend to include self-evaluation.

Stamford Associates, a consultancy that caters to large investors, tapped psychology professor Adrian Furnham from University College London as part of an effort to use psychology in choosing and monitoring asset managers, reported the Financial Times. Numerous wealth managers are also looking into the psychology that drives portfolio managers in making fund selections.

“There are a number of personal characteristics that seem to predict behaviour and performance over time,” Furnham said. Based on meetings with fund managers and the people who know them, he’s determined that a fund manager’s attention to detail, intellectual curiosity, ability to analyze granular information, and relationships with peers and subordinates affect their performance.

“The best managers are the best at getting the best out of their analysts,” he said.

Realizing that emotional volatility can grossly impact one’s decision-making ability, Furnham told the Times that he is also interested in fund managers’ responses to failure. In particular, he noted that being defensive and highly emotional about failure, as opposed learning from it, is a particularly concerning behaviour. “It clouds their decision making and the decision making of everyone around them,” he said.

But that doesn’t mean managers should be totally detached. As explained by Greg Davies, head of behavioural finance at investor risk-profiling company Oxford Risk, people who have to make decisions need some emotional attachment to the future. That means fund managers who are aware of their emotions are “a step up” compared to those who say they leave their emotions at the door.

“They should be asking: ‘Am I in an overly excitable state. Do I need to calm down before I make decision?’” he said. He looks for fund managers’ “pause points,” routines that force them to think before acting on a decision, such as writing the reasons behind a trade or explaining it to another person.

Oleg Chuprinin, a lecturer at the school of banking and finance at the University of New South Wales, also warned against the “disposition effect,” where investors and even professional managers tend to sell winning stocks very quickly while holding on to stocks that have declined in value.

Meanwhile, Colin McLean, CEO of British investment boutique SVM Asset Management, advises his employees to keep a record of their decisions. Noting that markets and stocks will underperform from time to time, he said managers need to know how to recover and apply risk-analysis judgements during those periods.

“If people maintain analysis of their own work, they can see some of their failings,” he said.


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