The speaker wore his usual uniform of a faded black Timberland sweatshirt and jeans; his London audience was all tailored suits and double-cuffed shirts. But as James Montier finished explaining why money shouldn't be equated with happiness, the equity and bond traders rose to their feet in applause.
"I don't think they heard much beyond rule 3," Montier quipped afterward. Rule 3 of his 10 for achieving sustainable happiness is, "Have sex."
Montier is an economist and global equity strategist at Dresdner Kleinwort Wasserstein, a German-owned investment bank. But rather than dwell in analyses of emerging markets and asset allocation, this 34-year-old maverick lectures London's big money traders and fund managers on spending their bonuses scuba diving or walking Peru's Machu Picchu instead of buying a Ferrari.
In fact, Montier flirts regularly with financial heresy. In one of his 40 research notes last year, he argued that investors with more data are not necessarily better off—we have only so much capacity to process information. In another, he claimed that analysts shouldn't bother meeting with execs at the companies they cover since analysts only ask questions that encourage the answers they want to hear.
After studying traditional economics, Montier took banking jobs in London, Tokyo, and Hong Kong. He began mining behavioral economics—then an emerging discipline at the nexus of economics and psychology—to explain investors' irrational behavior during the dotcom boom. He became intrigued by the role of human emotions in markets where prices were moved as much by psychological factors as by earnings reports.
It was a good career move (and not bad for Dresdner Kleinwort, either): Montier's synthesis of economic data with leading-edge behavioral research got him named London's "best global strategist" last year. "Montier has a substantial following because he focuses on things that are fundamentally different from the rest of the stuff I get in my inbox," says Curt Custard, head of asset allocation at Schroders in London, one of Montier's clients. "He is next to useless when it comes to telling me what the markets are going to do. But he has been incredibly helpful in leading us through self-critical examination of what drives our internal decision making at Schroders."
Ready, then, for some self-critical examination of your own? Here, Montier lays down five laws about investing bias, evolution, and true happiness.
- Leaving the trees could have been our first mistake. Our minds are suited to solving problems related to our survival rather than being optimized for investment decisions.
Every fund manager who comes to one of my presentations takes a 20-question test that convinces them they suffer exactly the same biases as everyone else. People respond to that in one of two ways: The first is to say, "Now I understand it, I'm smarter than everyone else, so I can outthink everyone else." No, you can't! You've just failed behavioral economics 101, which explains that we are all overconfident in our abilities. The other response is, "Okay, I understand my biases. Now help me develop processes to spot where they are most likely to occur, and minimize the scale of these biases."
For example, I tell fund managers to examine the sorts of questions they ask when they meet company CEOs and directors. Most people ask questions that will generate the answers they want to hear.
Philosopher Karl Popper wrote that after you set up a hypothesis, you should test it to destruction. You should look for all the evidence that goes against your view. But that doesn't happen in the City or on Wall Street. If someone takes a view on a stock or a market, he wants to hear all the evidence that supports that view. Most people are not inclined to sit down with people who disagree with them.
- Why does meeting companies hold such an important place in the investment process of many fund managers? Because we need to fill our time with something that makes us look busy.
There are several psychological reasons why meeting company management could well be a complete waste of time. Much of the information provided by companies is noise. We already suffer from informational deluge, so why add to the burden? Likewise, corporate managers are just as likely as the rest of us to suffer from cognitive illusions. They display just as much overoptimism and overconfidence as anyone else.
Another hurdle is our tendency to obey figures of authority. Company managers are often seen as being at the pinnacle of their profession, hence it's easy to imagine situations where analysts and fund managers find themselves overawed. Beyond that, we are simply lousy at telling deception from the truth. We perform roughly in line with pure chance, despite the fact that we all think we are excellent at spotting deception.
- Our minds are not supercomputers and not even good filing cabinets. They bear more resemblance to Post-it Notes that have been thrown into a bin and covered in coffee. The ease with which we can recall information is likely to be influenced by the impact that information made when it went in.
The brain isn't designed to be some kind of computational device. It was designed to keep us alive so that we can reproduce our genes. But in The Robot's Rebellion [University of Chicago Press, 2004], behavioral scientist Keith Stanovich reckons we are unique as creatures because the brain has a different set of interests from the genes. Our brains have the ability to rebel against what our genes would like us to do.
Our minds are suited to solving problems related to our survival rather than being optimized for investment decisions.
We have lived in an industrial society for 300 years. Is that enough time for our brains to have adjusted from the way they were designed for surviving the African savanna? Probably not. Just because we have a brain does not mean we understand all that it does. To make better decisions, we need to think more about thinking.
- Don't equate happiness with money. Materialistic pursuits are not a path to sustainable happiness.
The industry I work in is very money-oriented. People measure success or failure in terms of monetary gain. Yet when I discussed with my wife, friends, and colleagues what people define as happiness, money rarely came up. Beyond a certain level of wealth, it seemed to make little difference.
People in this business work insane hours for ludicrous amounts of money, but they don't have time to enjoy it. I didn't understand it. We equate wealth with happiness. But the more people I spoke with, the weaker that relationship seemed to be.
We have evolved to value relative happiness over absolute happiness. But just because we developed that sense of relative standing in caveman times, is that really today's ultimate goal? If I am content with what I have, why do I need to look over the fence at my neighbor's car?
- People adapt to income shifts relatively quickly; the long-lasting benefits are essentially zero.
So far, the single most important discovery in happiness research is the idea of hedonic adaptation. Put simply, we take things for granted after a while. Experiences are so much harder to get used to because they are unique events. When you buy a car, for a few months you cherish it, but within a year you're totally used to it.
The more you can do to slow down that pattern of getting used to things, the better. One of my recommendations is to stop, take note, and give thanks—not necessarily to God but just to reflect on what you've achieved and what you've got. You need to stop and think, "Actually, I'm damn fortunate."
Ian Wylie is a Fast Company contributing writer based in London.
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