(BFM Bourse) – Managing other people’s savings professionally involves dozens of different professions, but only one person decides on the investments (and then assumes them): the fund manager. A position at the top of the decision-making pyramid likely to flatter the ego – all the more reason not to entrust your money to a personality with a narcissistic tendency at the base…
Are you dealing with a charismatic manager, who likes to shine in society through his arguments, and willingly puts himself forward? No doubt a certain amount of self-confidence is justified, but watch out for what performance follows! However, an in-depth study by the behavioral finance research group of the Philipps-Universität Marburg suggests that fund managers with a narcissistic type personality is rather an indicator of underperformance for a UCITS.
In a study presented last April at the annual conference of the Swiss Society for Financial Market Research (SGF) and available on SSRN, entitled “Fund manager narcissism”, researchers from the German university highlighted two main flaws associated with managers with a narcissistic personality: an underperformance in terms of return in relation to the risk incurred and a tendency to deviate from the announced investment strategy, to the detriment of investors.
Described by Freud as early as 1614, narcissism has been the subject of countless studies for decades in a wide variety of fields. Schematically, this research shows that this personality trait manifests itself in two ways. On the one hand, an excessive self-confidence which leads to underestimating the probabilities of error, and therefore to taking more risks. On the other hand, a tendency to perceive oneself as superior to others, which leads to a (significantly) higher tendency to free oneself from the rules and standards that apply to everyone.
No better performance for more risk
To identify these traits among the managers, researchers from the University of Marburg Dominik Scheld and Oscar Anselm Stolper assisted by Anna-Lena Bauer (whose academic affiliation was not specified) went through the database of interviews of the wall street journal, The Wall Street Transcript (TWST), which includes word-for-word transcripts of interviews conducted with CEOs, executives, managers, analysts, and more. Focusing on managers, a ranking was made focusing on the proportion of use of first person pronouns (I, me, mine, my, myself) compared to the use of singular pronouns, a Narcissistic Personality Diagnosis (NPI) used since 1988. The researchers also tested their results by comparing each person’s LinkedIn profile, building on previous studies suggesting that the number of lines in a profile tends to increase at equal position in narcissists.
In terms of gross gain, the performance of funds managed by narcissistic personalities over a period from 2012 to 2018 did not deviate significantly from the average. On the other hand, this performance was obtained at the cost of a much greater risk – which means greater volatility in the value of the fund during the period studied, a disadvantage for the saver because he may have to exit at some where the volatility is against it.
In addition, managers with narcissistic tendencies tend to deviate from the strategy they are supposed to apply by taking more bets on small caps and on expensively valued “growth” type stocks.
Promote teamwork
For the anecdote, by comparing the rate of narcissism of managers (on a scale of 0 to 100% for the NPI), the researchers also found that it was twice as high as in a comparable study conducted with CEOs of companies.
More encouragingly, controlling for results against funds managed by multiple managers rather than just one, the study showed that teamwork (when only one manager tends to exhibit narcissistic traits) helps in part to erasing the negative impact, which should encourage management companies to favor collegial decision-making.
Guillaume Bayre – ©2022 BFM Bourse