What Malcolm Gladwell can teach investors about fund manager skill, and other investment matters

Wednesday 29 January 2020

Does the investment industry need a healthy dose of scepticism?

Author:Sarah Dudney

Malcolm Gladwell’s latest book, Talking To Strangers, should resonate with the investment industry, believes Sarah Dudney 

Malcolm Gladwell has long found his intellectual niche, supported by his global following as Communicator-in-Chief of the United States of America (in actual fact he is actually a Canadian). He uses his platform at The New Yorker to set out his stall of showing we homo sapiens for what we truly are – over confident, bias ridden two legged mammals. 

His latest best seller, “Talking to Strangers - what we should know about people we do not know” is well timed for our age of illusion, division and fake news. His book is relevant for those investors who meet companies and probe them on financial results.   Similarly, on the opposite side of the coin, this book has lessons for anyone who meets fund managers to evaluate their skill. Each side surveys the other with unrealistic expectations and inevitable disappointments. 

Gladwell writes a brilliant chapter on Bernie Madoff, on whom we assume we now know everything. He sheds new light on the cat and mouse chase between Harry Markopolos, the accounting expert who first shed light on the scandal, and Madoff, and the US regulatory authorities. How is that possible a decade on from that debacle? He does it. 

Gladwell first caught our attention in 2000 with his book Tipping Point.   His tried and tested formula is to rip open the dusty, untouched cover of academic sociological and psychological research, repeat the experiments, redisplay the conclusions, and find illuminating parallels in modern history to bring new insight to light. He is possibly the only writer I know of who could write a brilliant chapter on Adolf Hitler and Neville Chamberlain, segue into one with Sylvia Plath and Anne Sexton and yet ensure it all makes narrative sense. He does not break sweat as a writer, but as readers we have many anxious experiences, for he makes us confront our anxieties and weaknesses. We humans are easily duped.  

What Gladwell suggests, based on his detailed review of detection deception theory is that as humans we have a natural default to truth, ie to believe others. We need this mechanism in order to communicate in our ordinary daily lives. As Gladwell reveals, the main proponent in this area is Professor Tim Levine at University of Alabama in Birmingham, who has been researching this area since 1990.  Gladwell and Levine explore the idea that we are not programmed to spot liars. If indeed we do identify a liar, it may be just luck, however we may not acknowledge it as that. 

Reading Gladwell’s work is like sitting in a sixth form chemistry lab whilst watching a brilliant eccentric teacher blow up lots of test tubes. When we finally walk out of the Gladwell lab with our new insight how do we then manage our daily business?

Blaming the Other Guy

If his hypothesis is correct, we have a bias towards trust and optimism (so we always think we are smarter than we actually are).  Worse still, we think we do understand ourselves, and point the finger of blame at the stranger when it goes wrong (and rarely blame ourselves). As Gladwell points out, it is very trying to go around in a permanent state of mistrust. Cynicism is corrosive, but perhaps healthy scepticism is a better way forward. The best we can hope for is well managed neutrality in our encounters with strangers. Buyer beware.

As a head-hunter in asset management I spend a lot of time with strangers, either face to face or on phone conversations. In fact, it is rare I am with people I really know well, apart from colleagues and clients.  I have learnt that like the rest of us, I have hardwired biases (bias number one revealed - my shoulders slump down with relief when I speak to a fellow Scot). We all need to apply ruthless compassion, and treat everyone in equal measure. In this urgent period of building diverse teams, we have to be aware of our multiple biases, both conscious and unconscious.

Gladwell is not a fan of interviews, even though he does many of them himself as a journalist (he must really relish the experiments which can then give a data driven response to his ideas). So what I usually bear in mind is that it takes three meetings/ interactions to understand a stranger, and move that from stranger level to acquaintance and make a judgement at a later date when more time has elapsed.  I have tested this out informally, yet in our time starved world this can sometimes seem a challenge. But it is worth the investment of time. 

Phone interviews help, as you focus on one voice are not distracted by visual senses.   When you do meet a new contact it can be useful to read all the documentation, take it to the meeting, then set it to one side. You need all your efforts and energy to be focused on listening to the person you are meeting. Let them talk and really listen to what they are trying to say/ explain and or promote.  Be aware of your own biases at all levels. Be conscious of your first impression of the person you are meeting, but do not be overwhelmed by it.  And best rule of all, if in doubt, there is no doubt, do nothing, it might save you a lot of trouble.

These are all important lessons for the investment industry, where enduring professional relationships built on trust are important, and where we rely on huge amounts of data and reporting to make investment decisions. A healthy dose of scepticism, with a willingness to truly listen and learn, can’t be a bad thing.

Sarah Dudney








 Sarah Dudney, Client Partner at The Buy Side Club





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