Professor Adrian Furnham says analysing the psychology of investment manager teams can give investors a valuable edge in the selection process
Behavioural psychology has been the subject of academic study for around 50 years, and has recently become the object of increased scrutiny within financial services as a source of insight into the behaviour both of investors and of those who manage their money.
Perhaps surprisingly, much less attention has focussed on organisational psychology. Also sometimes referred to as business or work psychology, this is concerned with behaviour in the workplace, and is focused on a number of topics, including leadership, group dynamics, corporate culture, organisational change and performance management. Work psychologists are frequently called in to help with issues like selecting senior managers, dealing with unusual turnover and counter-work behaviours as well as training.
For investors looking to appoint the right manager, analysis of how the investment management team operates can provide telling and valuable insights. In this sense it seems obvious that the expertise of organisational psychologists can really add worth.
Most portfolio managers work in small groups with their analysts. One of their tasks is the management of their direct reportees and each other, whether they are in a legal or quasi ‘partnership'. Some are naturally good managers who understand the fundamentals of performance management; others, less so. Like all managers, they are required to select and motivate their staff to get the best out of them: to set clear objectives, to provide useful and timely feedback and to offer support when necessary.
It has often been observed that some people attracted to the highly cerebral, numeric world of high finance may have some deficiencies in what is now known as ‘emotional intelligence', or the ability to understand and manage one's own and others' emotions.
Investment management teams can be structured in different ways and develop their own culture, which individually and collectively influence how the portfolio manager makes decisions. Corporate culture is easiest defined as ‘the way we do things around here' and includes all sorts of unspoken rules about time- and record-keeping, social interaction and, more importantly, workstyle.
In some highly homogeneous teams, ‘group-think' may develop, which can have serious and adverse consequences. There is often a difficult trade-off of between being a team of similar, like-minded, peers and those who hold rather different views on many issues: homo-vs-heterogeneity. In the words of Colin Powell, "every organisation should tolerate rebels who tell the emperor he has no clothes".
How managers acquire and evaluate information is not an individual process but influenced by those with whom they work. Some think of the wise and informed portfolio manager as an individual "homo economicus", making considered decisions on his/her own: but this is clearly not the case.
Managers may also devise remuneration packages for their staff which can have very important consequences for staff motivation and interactions. For instance, some analysts are incentivised by providing analysis that leads their portfolio manager to buy, sell or hold an investment position.
The nature and size of reward packages is a highly salient issue in jobs more characterised by extrinsic than intrinsic motivation. An informed manager knows that (large) salaries might attract people to jobs, but do not keep them. If a manager claims to be unable to motivate his/her staff because ‘if you pay people peanuts you get monkeys', let him or her go. They know nothing about people management.
Some managers are very thoughtful about their own style of management, and its impact on their staff. Others seem less insightful about the consequences of a particular remuneration package or the health and satisfaction of their employees.
Team dynamics and organisational culture can and do impact on how managers obtain and evaluate the information they use to make decisions. As such, we ask analysts questions about their inputs into the decision-making process, the positive and negative aspects of working for the organisation, and their perception of both the team and organisational culture.
We are also particularly keen to understand the underlying drivers of employee turnover and the way in which teams are structured to facilitate learning, development and ultimately career progression. We have learned that there is no ideal way to manage a small group: the span of control, group structure, reward packages, and patterns of communication all have a role to play. We also seek to identify teams who provide evidence that they are healthy, happy and adaptive, and those which are not.
Few portfolio managers work on their own or are solely responsibility for the investment results they generate. They choose peers to work with and they select a number of others (for example, analysts) to help them in the investment process. How they go about this is a key focus for our psychologists as part of the wider assessment of a manager's strengths and weaknesses. And in the highly competitive world of investment management, analysis of the psychology of investment manager teams can give investors a valuable edge in the selection process.
Adrian Furnham is professor of clinical psychology at UCL and works with Stamford Associates as part of its manager selection process.
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