Childhood Trauma and the Active Fund Manager
Experiencing divorce or death of a close family member tends to lead to risk aversion in adulthood.
Bloomberg, May 24, 2019
Over the course of any given week, I see lots of academic research. Some of its interesting, some makes me shrug. Occasionally, a study really makes me sit up and pay attention.
That happened (again) this week when I read about fascinating new research looking into how childhood trauma effects active mutual fund managers: Till Death (Or Divorce) Do us Part: Early-Life Family Disruption and Fund Manager Behavior.1
The study’s surprising conclusion: Fund managers with childhood trauma were more risk averse. They “invested in fewer ‘lottery’ stocks, exhibited less tracking error, and had lower fund turnover.” Surprisingly, the risk-adjusted returns were “roughly equivalent to those of fund managers who took on more total fund risk.”
What drew me to this research was the intriguing concept of traumatic pathologies impacting future investment decision-making and outcomes.
Some of this genre of research goes into details on the anatomical impact of psychological trauma.2 I am familiar with the canon of behavioral economics research, and the measurable impact that has on decision-making and subsequent investment performance. These are cognitive issues all people suffer from. I’ve spent decades studying this, and am as competent as any layperson to discuss this. The reader should be aware, however, I am wholly unqualified to discuss the physiological and medical details of how psychological trauma impacts brain and personality development — and so I don’t. 3
Regardless, the idea of psychological loss impacting adulthood makes intuitive sense (if you will pardon my hindsight bias). There has been academic research that found that when people come through life-threatening events with no ill effects, they are more likely to take on more risk in their careers. Perhaps their frame of reference is calibrating for risk – and finding its less risky than many people believe. An attitude of “Hey, I survived this disaster, so let’s go for it” is understandable for people with a data set of 1 and a positive outcome to a high-risk event. 4
Regardless, if you are curious about how childhood trauma impacts active fund managers decades later, read on . . .
Previously:
Fund Managers are Good Buyers But Terrible Sellers (January 23, 2019)
Stock-Pickers Don’t Know How to Sell (January 15, 2019)
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1. Till Death (Or Divorce) Do us Part: Early-Life Family Disruption and Fund Manager Behavior Betzer, André and Limbach, Peter and Rau, P. Raghavendra and Schürmann, Henrik, (March 16, 2019).
2. Footnote 2 from “Till Death (Or Divorce) Do us Part” notes: “Maier and Lachman (2000) note that surprisingly little attention has been given to investigating the long-term effects on individuals of family disruption in childhood.”
3. For a review of this literature, see Shackman, A. J., Salomons, T. V., Slagter, H. A., Fox, A. S., Winter, J. J., and Davidson, R.J., 2011, The integration of negative affect, pain and cognitive control in the cingulate cortex. Nature Reviews Neuroscience 12, 154-167.
4. See Eckel, El-Gamal, and Wilson (2009) who found that, following Hurricane Katrina, New Orleans evacuees became more risk-loving. See also Bernile, Bhagwat, and Rau (2017) who show that CEOs growing up in areas that experienced natural disasters, without potential personal consequences to the CEOs, display more risk-loving behavior as CEOs; potential personal exposure to the disasters reverses the effect.
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I originally published this at Bloomberg, May 24, 2019. All of my Bloomberg columns can be found here and here.
