Fund Managers with Psychopathic Traits Get You Less Money

Given the importance of wealth in this day and age, the decision to take a portion of your hard-earned money and make an investment should not be an easy one. After all, we all know that it can be a risky endeavor, which requires special knowledge and expertise in a highly volatile market.

One way to increase the chances of seeing more cash in your pocket is by choosing the right investment manager. These professionals make investments in portfolios on behalf of their clients, making sure that the investors remain happy with the size of their bank accounts.

When choosing an investment manager, there are four factors that potential clients usually consider, or what are often called the “four Ps”: philosophy, process, performance, and people. Of course, when allocating your assets to someone, you would want to know how that person makes decisions, how his or her philosophy is applied, and whether or not there has been consistent, satisfactory performance in the past.

But the “people” factor is most important. In our everyday lives, the decision to interact with others, be it professional or personal, is based on our judgment of them. Are they kind and caring? Sociable? Competent?

The truth is, personality is one of the most important factors in shaping our relationships with people. And what’s even more fascinating is how these personality judgments often fly under the radar. Many of these things happen by reading other people’s body language.

While this may seem like an intuitive concept, the importance of personality traits in financial investment is often overlooked. It is quite common to think: Why does it matter what the manager’s personality is like? All that matters is that they do their job, and they do it well.

However, this is a misconception. Recently, researchers looked at what is known as the “Dark Triad” of personality traits: psychopathy, Machiavellianism, and narcissism. Specifically, there has been an increased interest in finding out whether the presence of these three related traits in hedge-fund managers is associated with poorer financial performance.

The researchers asked if there’s reason to think twice before trusting a potential investment manager, based on their implicit personality cues.

What we currently know

It is widely believed that people with psychopathic traits (i.e., those who are aggressive, manipulative, and lack empathy for others) do especially well in competitive contexts, where they use their exceptional charm to climb to the top of the corporate ladder.

On the other hand, more recent research shows that psychopathic leaders are actually poor managers who bully their subordinates, are unable to cooperate with others, and tend to engage in all kinds of unethical workplace behaviors.

In the present study, a team of researchers, led by Leanne ten Brinke at the University of Denver, set out to investigate the impact of Dark Triad traits on financial investment performance.

Taking into consideration the two competing beliefs mentioned above, the researchers predicted that hedge-fund managers who display behaviors associated with these three traits, do indeed fare much worse when it comes to financial performance, as compared with their more ‘average’ counterparts.

Study methods & results

101 hedge-fund managers were selected to be in this study. The individuals were chosen based on the videos of semi-structured interviews conducted as a marketing strategy to recruit new clients. These managers held senior positions in their firms and were in business during the years 2005-2015, the period of time the researchers were most interested in, given the high economic diversity in those years.

A group of trained coders were first instructed to watch each video and pay attention to the nonverbal behaviors associated with each of the Dark Triad traits. For example, psychopathy would manifest itself in the lack of emotional expression or superficial charm. The trait of Machiavellianism could be detected in a manager who is overly dominant and does not show any signs of embarrassment. Lastly, if a coder noticed that an individual was too flirtatious and talked excessively about himself, then those behavioral signals would be interpreted as traits of narcissism.

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Next, coders were asked to rate each behavior on a Likert-type scale, from 1 (not at all) to 7 (highly). Finally, the researchers analyzed each manager’s annualized investment returns, as well as their risk-adjusted returns over the period of 10 years.

In line with the predictions, managers who scorer higher than average on psychopathy, based on their nonverbal behaviors, earned 0.88% less each year, compared with a manager who displayed less psychopathic behaviors.

Similarly, managers with narcissistic tendencies were found to have lower risk-adjusted returns, as compared with their less narcissistic counterparts.

Why it matters

In light of these findings, the decision to make an investment has probably become even harder than it was in the first place. Obviously, no one wants to lose money, and you’re probably not sure how good you are at figuring out someone’s personality based on a few nonverbal behaviors. How do we know if we’re making the right “people” decision?

Luckily you’ve got a built-in function you probably don’t even know about. Decades of research has shown that we are remarkably skilled at detecting the presence of certain personality traits just by observing a person for a few seconds. It happens on an unconscious level, which means that many of these judgments come through as subtle twinges of bodily based effect—our gut hunches that “tell us” whether or not someone can be trusted.

Paying attention to those behavioral cues can really make a difference for all of us who deal with people on a regular basis. We want to make sure that those we choose to associate with have only our best interests at heart, and can be trusted.

And as you can imagine, this task becomes particularly critical for potential investors, whose one wrong decision can have a huge impact on your financial and personal well-being.