Saturday mornings as a kid, I’d cozy up to the TV, cereal bowl in hand, watching Fat Albert and the Gang. Invariably, my mom would say, “You’re sitting too close to the TV. You’re going to hurt your eyes.”
Back then, I wasn’t the only kid who was told by a well-meaning parent about the evils of sitting too close to the TV. Parents have been saying it for years, and they continue to preach it. But it’s folklore.
Folklore is powerful, pervasive. And it can be flawed.
Recently, I had the chance to attend a webcast hosted by Boston Financial, “The Folklore of Finance, How Beliefs and Behaviors Sabotage Success in the Investment Management Industry.” Suzanne Duncan, senior vice president, global head of research for State Street’s Center for Applied Research (CAR) and her colleague, Sean Fullerton, senior research analyst for CAR, discussed their latest research, including why the industry and investors need to develop a “new” Folklore of Finance to achieve future success.
Why should the industry care about the folklore that exists in finance today? It greatly influences investors’ and investment professionals’ behavior- even dominates their decision making according to Fullerton. When the beliefs are useful, they can have a positive effect; however, when flawed, they can be detrimental, even cause us to do things that aren’t in our best interests or the interests of our investors.
Take the Folklore of False Comfort, one of three distinct folklores within the industry identified by Duncan and Fullerton. According to Fullerton, the Folklore of False Comfort is about looking for comfort in the concrete and measurable while avoiding things that are abstract and difficult to measure.
Our industry’s tendency to overuse concrete tools, such as benchmarks and fund rating systems, is an example of the Folklore of Comfort in action. It can cause us to ignore the constant uncertainties of the market, putting investors and investment professionals at risk, notes Fullerton.
Another takeaway from CAR’s findings is that both investors and investment professionals need to re-evaluate their definitions of success. Institutional and individual investors say the reason they invest is to reach long-term goals. Yet very few of them actually define success as reaching those goals. Meanwhile, the industry is hyper-focused on alpha. According to CAR’s findings, the industry spends more than 60 percent of its capital on the pursuit of alpha.
Duncan and Fullerton recommend the industry reallocate resources to maximize value in the areas of both alpha and the achievement of long-term goals. They also advocate that the industry should instill a new folklore, or belief system, that works toward both of these goals.
If you’re an investor, or investment professional, the Folklore of Finance may be influencing you, and you may not even be aware of it.
Interested in learning more about the Folklore of Finance, and what it means to the future of the industry? Download the full report: The Folklore of Finance: How Beliefs and Behaviors Sabotage Success in the Investment Management Industry. Or reach out to the Center for Applied Research directly at firstname.lastname@example.org.