Fund Managers on the Couch
Professor David Tuckett (UCL) has taken a refreshing look at the financial crisis. As a psycho-analyst he interviewed 53 senior fund managers, who between them control over $500 billion. He found that the financial sector isn’t driven solely by rational number-crunchers. On the contrary, Tuckett argues that the high competitiveness and uncertainty of the investment management industry, actually mean that emotions are strong drivers of behaviour in financial markets.
Central in Tuckett’s analysis are the concepts of the ‘basic assumption group’, ‘divided states of mind’ and ‘phantastic objects’. All fascinating, and well explained in Tuckett’s paper. What it boils down to (my summary) is that fund managers are asked an impossible task: to outperform a market that simply can’t be outperformed through rational deliberations. Compare it with having to go to the casino (everyday!) and being expected to end up with more money than you went in with, each year, at the risk of losing your job. The only way to emotionally survive this is to support each other, agree on comforting ‘stories’ and pray for the best.
Tuckett is probably too absolute in equating the stock market to a casino. Financial markets do have a real role to play, putting our money to its best use. In doing so, there is plenty of room for cognitive analysis. Exceptional results in this field should be rewarded, not merely attributed to luck. There is a danger in curbing competition between fund managers too much, in containing their ‘animal spirits’ too strongly. However, Tuckett rightly argues for this competition to focus much more on the real, long term, results. We, as savers and pensioners, should enable them to do so. A more relaxed financial industry may well turn out to be a very good investment.