Behavioural aspects to investing are much more widely discussed in professional circles these days than just a few years ago thanks to the growing number of economists and writers who study the less rational actions of market participation. Human biases impact on investment decisions and they are no longer considered soft issues by market researchers. Herding and market bubbles, for instance, and their link with funds manager momentum strategies exist because of consistently irrational behaviour.
One of Australia’s foremost economic writers, Ross Gittins, has devoted his latest book, The Happy Economist, to an entertaining walk through the myriad of studies on happiness. Gittins is the long-time economics editor of The Sydney Morning Herald who has been increasingly questioning some of the assumptions and traditions of the economics profession. He believes that happiness is the most important measure of economic success. Most of the studies referred to in the book provide correlations between a whole range of factors and wellbeing. They are not proof of causal relations.
It is now well-accepted that money is important, sure, but only up to a point. After basic needs are met, including security, the extra satisfaction one gets from more money or goods and services is only relative to how much one’s peers are getting. You might be happy with your new Porsche but following a process of “adaption”, your overall level of extra satisfaction will diminish with time. This will happen more quickly, too, if your neighbour turns up with one in the driveway as well. Less well-publicised correlations with happiness explored in the book include voting habits between conservatives and what the USbased researchers call liberals. It turns out that conservatives tend to be happier than their more liberally minded counterparts. Gittins points out that conservatives are also more likely to be married and go to church and it is probably these two factors which influence the correlation. Married churchgoers are much happier, on average, than secular singles.
Happiness correlates highly with success in any endeavour. Happy people tend to be optimistic, confident, have higher self-esteem and are more extroverted. Which are all good attributes in most businesses. But the investment industry is a little different from other industries in many respects. A little overconfidence in investment decisions could be disastrous.
Optimists, while no doubt being more agreeable to work with than pessimists, may not be better investors. To a large part, a portfolio manager is tasked with predicting the future for a stock, say, based on a range of variables. But studies have also shown that pessimists are actually better at making predictions. People with both types of personality traits are less good than the “average” at making predictions, with optimists overshooting on the high side and pessimists overshooting on the low side, or undershooting. But pessimists actually get closer to the mark. To the extent that you can influence your own happiness – and a good part of it will be genetic – the crucial ingredients are attempting to lead a satisfying life of endeavour, achievement and mutually rewarding relationships.