Investor Psychology: Faster, Investor! Kill! Kill!
Does investing wisely turn you into a psychopath?
Conventional wisdom, backed by clinical research, claims that between three to six million Americans are stone-cold psychopaths. One to two percent of the general population is the figure commonly extrapolated from studies performed by Robert Hare, a University of British Columbia psychology professor, and various colleagues.
Hare is the academic superstar of the psychopathology universe. He’s most noted for his creation of the Psychopathy Checklist, used in penal systems worldwide, and his co-authoring of Snakes in Suits: When Psychopaths Go to Work, a kind of Who Moved My Cheese? for the mildly paranoid.
Recently, an article in CFA Magazine by Sherree DeCovny garnered online buzz when DeCovny cited Wall Street psychotherapist Christopher Bayer’s claim that 10% of people in the financial services sector are psychopaths. A “conservative estimate,” according to Bayer, but one that makes sense when you run Hare’s checklist against the qualities that make a successful broker. And this estimate certainly plays into the general population’s current perception of Wall Street as a Caligulan den of amoral iniquity.
Beneath the attention-getting, cliché-reinforcing headlines, though, things get murkier. There is growing controversy over Hare’s checklist, for example, and one must also consider the current societal/clinical fixation on classifying psychopathic behavior (see Jon Ronson’s fascinating 2011 book The Psychopath Test).
More disturbing -- or obvious, depending on the breadth of your experience -- is the assertion that psychopathy is a sliding scale. Says Harvard’s Ronald Schouten (co-author of the upcoming study The Almost Psychopath): “Psychopathy is mistakenly regarded as an all or nothing affair: you either are a psychopath or you aren't.… . That yes-or-no approach dangerously ignores the fact that psychopathic behavior exists on a continuum. A great deal of damage can be done by individuals who fall in between folks who are 'normal' and true psychopaths.”
Rather than taking another (axe-)swing at the full-blown, Bret Easton Ellis-style psychotics of popular imagination, Schouten and James Silver discuss sub-clinical psychopaths: the 15% of us who, they claim, “who would never be diagnosed as a psychopath, but whose behavior to varying degrees can be just as deceptive, dangerous, and remorseless as that of a full-blown psychopath.”
So, be careful out there, I suppose. With a few dozen million psychopaths and sub-psychopaths cruising the corridors of the finance world, chances seem pretty high that at least one person you know is currently dispassionately planning a path to success that will, as merest byproduct, leave you crawling in the wreckage of your hopes like the vile creature you are.
On the bright side: at least you’re not the monster in the corner office. Or are you?
Well, that depends on your investment strategy. Even if you’re the nicest, fluffiest person in the world, and you have never wished death or injury upon anyone (that co-worker who keeps Facebooking you links to his daddyblog, say), the simple act of investing wisely, says Lynn Stout, turns you into a psychopath.
Stout, a professor in corporate and business law at Cornell writing for The Atlantic, is not exactly Occupying Wall Street. Indeed, the “deeply principled Republican” starts off her piece by dismantling the straw man argument of “homo economicus,” that raw, pure-profit-motivated shareholder whose value must be maximized at all cost: “[This] purely rational, purely selfish person is a functional psychopath,” she notes. “If Economic Man cares nothing for ethics or others' welfare, he will lie, cheat, steal, even murder, whenever it serves his material interests.”
However, Stout adds, “[A]lthough homo economicus is alive and well in many economics departments, many experts today prefer to embrace behavioral economics, which relies on data from experiments to see how real people really behave. Behavioral economics confirms something both important and reassuring. Most of us are not conscienceless psychopaths.”
Yay! “[S]cientific evidence demonstrates the vast majority of people will make at least small sacrifices to follow their conscience and help others.”
That’s why we become so fascinated by the Madoffs and Boeskys of the world, she notes; because they're so different from the way things almost always are: “We should remember... that cheating, corruption, and murder make the news because they are relatively rare. (No newspaper would run the headline: 'Employee Doesn't Steal, Even When No One's Looking.’) As the phrase 'common decency' suggests, prosocial behavior is so omnipresent we tend not to notice it."
Stout also notes the growth of Socially Responsible Investment (SRI) funds: “SRI funds invest in companies that support consumer protection, human rights, or environmental sustainability, and avoid firms that promote tobacco use, child labor, or weapons production. While the evidence is mixed, at least some studies find SRI funds slightly underperform other funds. Nevertheless, SRI funds have been attracting money at a faster rate than the institutional investing industry as a whole. By 2010, 12% of all professionally-managed assets were managed by SRI funds.”
Many of those SRI funds have offered investors decent returns, in some cases out-performing the S&P 500 (SPY). Here's a snapshot of how some major SRI funds have performed since January 1, 2010. This chart compares the Parnassus Equity Income Fund (PRBLX), the Neuberger Berman Socially Responsible Investment Fund (NBSRX), the Pax World Balanced Individual Investment Fund (PAXWX), and the TIAA-CREF Social Choice Equity Fund (TICRX) against the S&P 500.
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Well, isn’t that all rather lovely. But nevertheless, the siren call of “maximizing shareholder value” frequently and famously leads to psychopathic behaviour by corporations: consider the two examples cited by Stout:
- Union Carbide (DOW), the 1984 disaster in which more than 40 tons of methyl isocyanate gas leaked from a pesticide plant in Bhopal, India, killing 4,000 people on the spot and delivering accelerated death for many thousands more. Pressure from intense competition had led Union Carbide to implement "backward integration" -- manufacturing raw materials and intermediate products in one facility, a more sophisticated and infinitely more hazardous method. When crop failures and famines further reduced the pesticide market in the mid-1980s, Union Carbide started plans to dismantle the factory, while keeping it operating with a blatant disregard for safety and an eye gruesomely fixated on shareholder value.
- The BP (BP) Gulf oil spill disaster of 2010, the largest ever accidental marine oil spill, in which an explosion on the Deepwater Horizon drilling rig in the Gulf of Mexico spewed about 4.9 million barrels of crude oil into a fragile ecosystem over the course of three months. When the White House oil spill commission released its final report in 2011, it blamed BP and its partners Halliburton and Transocean; in particular, it blamed a series of cost-cutting, shareholder-value-maximizing decisions made by the three firms that made the incident inevitable.
Why is that? With studies showing that 97% of us would engage in prosocial investing behaviors to some degree at least, why are SRIs still only 12% of the market? Why are only a few shareholders pressuring the directors and executives of their companies to adopt more ethical practices, more in line with most shareholders’ value systems and, indeed, long-term interests?
To answer this key question, Stout turns to Harvard law professor Einer Elhauge’s 2005 article for the New York University Law Review, Sacrificing Corporate Profits In The Public Interest.
The first reason Elhauge comes up with is straightforward: we know nothing, and deliberately so:
The second reason is slightly more complicated: “[P]rosocial investors face a classic collective action problem, a kind of Investing Tragedy of the Commons. If SRI funds provide even slightly lower returns than other funds, the investor who chooses SRI funds is paying a modest price for his prosociality. Yet his individual decision to ‘put his money where his conscience is’ will have little or no impact on the behavior of the corporate sector as a whole. Elhauge concluded that ‘it is remarkable that many people do invest in socially responsible funds considering that their individual decision to do so has no significant impact on furthering even their most altruistic of motives.’”
Even more of a motivator in such amoral behavior by innately moral creatures? The rhetoric and dogma of shareholder value. “The ideology of shareholder value drives corporate managers to make business decisions contrary to prosocial shareholders' true interests,” says Stout. Another element of this toxic cocktail: the essentially psychopathic nature of the corporation itself, as prominently discussed in Joel Bakan’s intriguing 2004 documentary, The Corporation... though Stout isn’t buying Bakan’s thesis completely: “As University of Toronto law professor Ian Lee puts it: ‘if corporations are in fact 'pathological' profit-maximizers, it is not because of corporate law, but because of pressure from shareholders.’”
So the next time that shark in a suit from floor 50 goes gliding past your office door on his way to eviscerate some unfortunate underling, hold your fear and contempt in check, just a bit. He’s a monster. He probably did terrible things to kittens when he was a youngster. But you, if you have any money sense at all, are probably more like him than you’d like to admit. And while the psycho in the corner office causes misery to everyone around him, all evidence suggests that your healthy resource-based stock portfolio takes that misery and compounds it on an international scale.
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