A sin sanctioned insensitively by the gods

The professional manager is not rational individual described in textbooks. Like everyone, it can be submerged by his emotions. Its performance is directly related to control of instincts natural and other very human travers. Different bias observed in behaviour illustrate the seven original sins: pride, greed, envy, laziness, gluttony, lust, anger.

Pride: overconfidence.

Since the Greeks, "hubris" or excess of confidence men has been the source of the worst evils. A sin sanctioned insensitively by the gods. Markets, the sanction is daily. Because, in the management of assets, this high esteem self-esteem is apparently beyond the humility of facade displayed to clients. Thus, nearly three quarters of the 300 managers interviewed by James Montier, of Dresdner Kleinwort Wasserstein, in its report felt above average in their work. This overconfidence is particularly strong among young men. Women are less subject. Studies also show that the worst forecasters are often those with the most confidence in their abilities. The proud Manager soon, for example, to sell the securities which are lost in its portfolio to avoid disgruntling the good image of him.

Greed: hyperactivity

Manager.

Corollary of this excess of self-confidence, managers tend to be too active. The portfolio turnover rate is too high, which translates into an increase in transaction costs and a decline in performance. This fear to miss the slightest opportunity to them them attracted to the market like a magnet. Any suspicious movement in the market is a sign that it happens there something suspicious and already stirs up the appetite of the Manager.

This hyperactivity is rooted in part in the evolution of the behavior of its customers, investors. Thus, between 1950 and today, the average length of detention of a Fund has increased from 10 years to four years, according to estimates by John Bogle, the former President of Vanguard (see illustration below). The reduction of the investment horizon increases the "short-termism" of the Manager, whose performance is evaluated and found to be constantly shorter periods. It will be then tried to intervene more frequently in the market and to marry the ups and downs. Follower more than Scout.

Envy: cozy comfort

the "crowd".

"Never follow the crowd." The Council of the famous American financier Bernard Baruch, one of the éminences grises of President Kennedy, is probably less followed markets both average behaviour there seem common and widespread among all stakeholders: operators, analysts, managers...

Wrong alone is not sustainable long for a Manager under pressure from his employer and its customers, unhappy to see it do less well than the market. Hence his incentive to join the crowd. Among managers, the propensity to imitate its neighbour seems stronger for those working on smaller companies or the values of "growth". Indeed, the prediction of the progression of the benefits of these is often more sensitive to the so-called values of performance, encouraging more managers to copy each other.

The Manager is young, the more tendency to imitate his fellow. By communicating with each other in events, seminars, or cocktails, managers are also mutually influenced unconsciously. Work shows that the composition of the portfolio of a Manager is more influenced by that of a professional located in the town than by that of other metropolitan.

Laziness: torpor

intellectual.

The world of management do not like the relitigation of the concepts and framework of thought in which it has evolved. Continuity is her master word. As good jams, the recipes for success, timeless, keep out the light and the time passing. A good way to reassure and attract the customers by making the longevity of the management company a guarantee of its future success.

Innovation and research are sometimes tumultuous intrusion in the mental world of the Manager. The source of its torpor and its intellectual numbness in important and indisputable advances. "Investors structured their world and their thinking instead in terms of stories and facts." "A dangerous natural penchant", notes James Montier.

Managers like well tell and tell stories. Perhaps even eventually believe. The world of investment includes many myths whose origin is lost in the mists of time and who acquire the status of untouchables truths.

For example, the emerging countries with the highest growth would be those which register the best stock market performance of this category of countries. This type of reasoning, yet totally contradicted by the facts, still figure prominently in most of the presentations on emerging markets.

Greed: greed

information.

Batteries formed by notes and reports from brokers grow every day more on the Office of the Manager. As to obscure the view. But assailed applicant, the latter must pass to sieve the uninterrupted flow of data to him. If the markets are efficient and rational, the best way to beat them would be information that other managers do not have. Hence the quest unbridled professionals to find new ideas in seen as ever more complex and competitive markets. Only, there are limits in the human ability to properly process the information.

Their increase further increases the confidence of Manager in its capacity as the accuracy of its forecasts, therefore its performance. Indeed, the psychology studies show that individuals often take exactly the same decisions, regardless of the amount of initial information at their disposal. Their excesses, uncontrolled, increases the mistakes.

Lust: the carnal connection

with the companies.

The link between a Manager and "its" value is often carnal, especially on small and medium-sized companies with which relations are often less formatted and warmest with major groups. This may partly explain the good performance of some managers, who receive, after several years of access to the management of these better business than others.

Only, this relationship of trust can be an anchor leading to the Manager to the bottom in case of problems in society.

The emotional blur the professional judgment, as the business leader, little doubt authority figure, has often tended to be too optimistic about the prospects of his company despite the risk of disappointing the market then. Moreover, during his meeting with the company, the Manager will be subject to what psychologists call the "confirmation bias": rather than to get the "small beast", he traquera the information coming to reinforce its initial opinion, he would not challenge.

Anger: the Manager-juror

in charge.

In his film "Twelve Angry Men", Sidney Lumet tells how the twelfth juror of a trial will eventually succeed in reversing course in convincing the other eleven of the innocence of the convicted person. Behavioural studies have not reneged on this happy ending.

They show that, cancel and correct the errors of its members, the Group tends to to amplify the bias and the travers. Its forecasts are not necessarily better than those of an individual, not more than its ability to flush out hidden information. In addition, it can induce adverse effects among its members: conformism, polarization, imitation... The Group would not specifically have the power to restrain and discipline the "animal spirits" who seized the Manager.

Funds managed by a team are not better than those that are managed by a single individual. In any case, they seem less risky and less expensive, investor as for management companies who, because they are constantly launching new funds, cannot hire a new Professional each time.

According to Morningstar, the proportion of funds managed by a team in the United States doubled between 1992 and 2003 to 60.