All investment managers work hard to portray themselves as cool, calm rational creatures.
We would want our clients to see us as evidence-based decision makers and would surely not want to be seen as ever making a decision out of our emotions, or worse still simply because of the inherent biases contained in the brain we were born with.
Bad news then comes from Hannah Critchlow, a Cambridge neuroscientist and author of a range of neuroscience books including ‘The Science of Fate: Why the future is more predictable than you think’. Her focus is to study how our brain’s physiology affects our decisionmaking and how we can train ourselves to think longer-term, a vital heuristic tool for investors seeking to avoid being blown around by the winds of market sentiment.
A key conclusion she has reached is that much of who we are, how we think and the decisions we favour is based not on the data we receive into our brains but simply how they are built in the first place.
Her central thesis is that we underestimate how much of our behaviour is linked to the brain physiology we happen to have. For example, she argues the size of different portions of the brain can indicate our political preferences. She claims that around 30% of our ideology is attributable to our identifiable brain structure. Brain region volumes predict with 72% accuracy, she argues, whether people have liberal-minded or conservative viewpoints. The amygdala region of the brain – which drives our threat response – is larger amongst those with a conservative worldview, it makes them hostile to big new ideas.
So how does our brain physiology affect the way investment managers make decisions? Critchlow argues that because we have inherent biases which we are never likely to fully successfully isolate, the only viable way to improve our capacity to understand the world is to pool our analysis of the world with others, hoping that this blurs away the damaging effect of bias.
This is not a thesis that supports the lone wolf star fund manager theory, committees reign supreme when we must work to limit the damage of our own physiological bias.
Consensus is more likely to be right than contrarian eccentrics. “We can see this in many different fields, that cognitive capacity increases when people work together rather than in isolation. Our genes create biases in our brains. When you bring different brains together those biases start to balance out and create a more accurate representation of the world - and there are scientific studies that prove this – you can create a better decisionmaking profile.’
The key word used by Critchlow here is ‘capacity.’ It is not merely that larger groups make better decisions, but they actually are able to deploy more intellectual fire power by working together than the sum total of the cognitive ability of the individuals would suggest.
Her philosophy also argues for more diverse investment teams. In particular, she is able to point to studies which show that the more women in any one team the better that team becomes at taking turns sharing ideas. This enables the collective biases to better blend out and for more accurate decision-making. “Taking turns is vital not just for our own intelligence but for the group’s intelligence.”
One simple measure of the power of diversity when making decisions comes from studies which examine the number of women in a team. Because women are, her studies show, in general better at listening to others’ opinions. She has found teams including larger numbers of women do a better job of tackling neurological biases.