Is the glass half full or half empty? In a column in the Financial Times last month, Lucy Kellaway reprinted the following letter from a disheartened fund manager, and asked readers to respond.
“I am a fund manager in the UK. My job is great: flexible and well paid. My problem is that I don’t believe it is possible to outperform other fund managers with any consistency. I believe the industry is based on the lie that fund managers add value through skill, rather than luck – which makes it hard to keep motivated. Should I move – even though I can’t think of anything else I want to do – or should I accept the idea that work is not meant to be meaningful?”
Notably, responses to the letter varied significantly. One fund manager, who had been in the business for over 25 years, said he agreed with the sentiments of the letter completely. Another fund manager responding claimed a 14-year stretch of outperformance, and said that this proved the claim was wrong, and put the initial letter down to the writer’s own failure as an investor.
The interesting thing to note in the exchange is that even those who manage money have completely different interpretations of the same experience. One argues it is impossible to outperform consistently, the other ‘knows’ that it is possible because of their own record. In effect, these are different explanations. In psychology, people are described as having different ‘explanatory styles’ depending on how they assess experiences. These explanations can tell us a great deal about how people see the world.
In his work on optimism and pessimism, Dr Martin Seligman indentified three strands that form a person’s explanatory style. The first is permanence. An optimist will see a bad situation as temporary, while a pessimist will tend to see it as a permanent trend. The second factor is pervasiveness. An optimist will see a bad experience as specific, whereas pessimists will tend towards a universal interpretation. And finally, with respect to personalisation, the optimist will blame bad events on external factors, whereas the pessimist will internalise the problem. In addition, each of these trends can be seen working in reverse. So an optimist will see a positive event as resulting from their involvement, whereas the pessimist sees it as resulting from external factors.
Seligman and other researchers developed a technique termed ‘content analysis of verbatim explanations’ (CAVE) to enable them to assess a person’s explanatory style. If we apply a CAVE-type approach to the example of the fund manager who wrote the original letter, we may well conclude that their outlook is pessimistic. In their view, the factor that determines success in their field – investment performance – is out of their control, because it is a question of luck. In addition, this is a permanent facet of markets, not a temporary blip. In contrast, the fund manager replying that he has outperformed has all the signs of an optimist. It is possible to outperform, and inability to outperform is likely a result of personal failings. There is also a clear implication that this manager’s outperformance is down to their own talent.
More fundamentally, Seligman claims a clear link between optimism and performance (and good health). Having carried out CAVE research on presidential hopefuls’ speeches, he found that time and time again, the more optimistic candidate won. He has also helped train insurance salesman in techniques to maintain optimism, to enable them to get over knock-backs when selling in difficult markets.
Notably, he argues that at corporate leadership level, while a CEO should have an optimistic nature, other functions, such as finance, benefit from a more pessimistic explanatory style. According to Seligman, this is because pessimists tend to make more accurate assessments. While you need an inspiring vision to lead with, you also need a realistic view of results. Perhaps investors ought to consider applying a CAVE approach to statements made by board members.
This also provides a small crumb of comfort for fellow pessimists. We may be less successful, have worse health and die younger, but at least we have a realistic view of the world.
Tom Powdrill is head of communications at PIRC.
