The Surprising Impact of Personality On Investment Management

Despite the fact that quantitative investment strategies are increasing in popularity, there is still a large amount of capital that is being invested by carbon-based asset allocators. Even if a specific strategy exclusively utilizes machine learning and artificial intelligence, there is still a human that is crafting the specifications and building parameters on which the model is to run. Therefore, as much investors may be trying to guard against well-known behavioural biases, it is unlikely that investors will ever be able to fully purge the human element from the investment process, at least in the near future.

A recent article from the Institutional Investor examines a study published in 2018, in which researchers found that investment managers who exhibited, what researchers called the “dark triad”, (narcissism, machiavellianism, and psychopathy) underperformed their peers by a full percentage point per year over the decade examined. On the surface, this seems like groundbreaking research that can be applied by allocators of capital who screen prospective investment managers. However, the practical application of asking managers to take a behavioural test to determine whether or not they exhibit psychopathic tendencies might not be the best way to begin a working relationship. In addition, screening for investment managers based on certain personality characteristics comes with its own potential biases. You might end up with portfolio managers who think and act in a similar fashion, which inadvertently ends up reducing portfolio diversification. So while it may seem like using personality tests is a surefire way to avoid underperformance, the consequences of these behavioural assessments are less desirable.