Author: Adrian Furnham
We all make decisions in different ways. For fund managers, this has a variety of implications, writes Adrian Furnham.
Would three portfolio managers, given the same decision-making task, do it in similar ways and come to similar conclusions? Or would their idiosyncratic preferences and style lead to very different outcomes? Some seem ponderous, others impulsive; some can never get enough data, others trust their intuition. But is there an ideal or optimal style that leads to better decisions?
It is not a surprise that different individuals prefer to make decisions in different ways. It can come as a great shock to go shopping with a friend who approaches the whole business quite differently from oneself, for example, and spenders get a real surprise when they engage with savers. Time keeping is another such issue: the fury of the time-contractors who understand that 09:00 means just that, as opposed to the time-estimator who believes 09:00 is between 08:00 and 10:00, which is the zone in which the agreement has been made, and one can pitch-up.
So what are the nature of the differences? Decision-making style differs on a wide variety of dimensions, some of which are related to one another. The most important are detailed below:
- Fast vs Slow: Some can and do make decision rapidly, even impulsively; while others like to ponder to the point of near paralysis to commit.
- Risk vs Risk Averse: Some people seem unconcerned with risk of all types, thrilling in the adrenalin buzz that it brings; but for others, even minor risk appears to freeze them.
- Empirical vs Intuitive: Some like to gather data and make actuarial, probabilistic decisions with statistical support; others work more on gut feel and emotions.
- Rule Following vs Rule Breaking: Some like to follow rules, theories, and past behaviours, adapting only occasionally to changed circumstances. Others rejoice in thinking “outside-the box” and being disruptive and innovative.
- People vs Things: Some investment managers find it easy making decisions about things (machinery, branding, investing), while others about people (employees, customers).
- Individual vs Group: Some managers like to make decisions on their own with minimal consultation; others like to consult widely believing in “the wisdom of teams”.
Most people can report fairly accurately on where they stand on each dimension, though of course they are just that…. dimensions, not categories. So some are very, very slow, others just slow-ish compared to the general population. Others do not always have an option, as their work dictates how decisions are (or at least should be) made…. i.e. done in groups, risk-averse and rule following.
And of course, it is true, that it does depend on the decision. Choosing a sandwich versus a car versus a big investment decision is hardly equivalent. Yet, people do show characteristics which pervade all their decision making: ditherers dither over almost all decisions; intuitives rarely gather much data.
Hopefully, through wise vocational choice, one ends up in a job that “fits” with one’s decision making style. In the investment world these are nearly always heavily empirical, reasonably slow and done in groups. There will of course be differences in appetite for risk, as well as risk following.
Understanding different styles
Researchers in this area have developed different typologies with style preferences named things like Directive, Analytic, Conceptual or Behavioural. Others have talked about left-brain versus right brain decision-making, or the difference between Adapters and Innovators. Some of these distinctions are more evidence-based than others!
It also comes down to individuals. Some professionals (accountants, architects, doctors) are technically sophisticated problem-solvers who, in general terms, have little idea or notion of a client/customer and their needs. Others believe their expertise is primarily dependent on the understanding and appropriate application of complex rules and procedures.
In some large businesses and consultancies, these professionals may be crudely divided into client-facing versus behind the scenes roles. They gravitate to a comfortable niche that reflects personal preferences and predilections. Indeed, it may be possible to classify them into four broad groups:
- The adviser: The adviser is client-centred. They are genuinely interested in, care about, and listen to clients. They see themselves as specialist professionals, not academic experts. They know that problems are not standard and tend to be flexible in how to apply the rules and policies. Clients like these professionals. They tend to ‘think aloud’ for clients, giving them various options to choose from. They believe that the client should choose/decide based on the best advice they give. Advisers are usually extrovert, curious and a bit maverick. Many are distrusted because they get on so well with clients. Often colleagues are jealous of them as they are asked for by name more than others.
- The technical specialist: These types pride themselves on knowing their area well. They have a mental library of odd cases, interesting exceptions and unique problems, yet still believe most problems are of a particular type. They are good at diagnosis, but once done, attempt to apply rule-bound standard solutions. They solve many problems well – quickly, efficiently and correctly. Although odd cases amaze them, they can be a little inflexible in applying unique solutions. They certainly come across as able, workmanlike and efficient. Crisp, down-to-earth types, they may be a little insensitive to client needs. They are not always tolerant of clients who cannot explain or describe what they want to know.
- The counsellor: They enjoy client work and try to see problems from their point of view. They tend to understand that problems are not neatly the province of one professional or another; accountancy issues have legal implications. They know the rules and procedures, but are not unduly hampered by them. They get involved and can read people well. They are different from the adviser, predominantly in their ability to think outside the box, offering unusual rule-bending solutions. They are good judges of others’ characters and have a very loyal following.
- The expert: Experts are academic: they know a lot, think clearly, have independent ideas. Client problems for them are an intellectual challenge. Once the client has explained the problem to the best of their ability, the expert gets to work, creating new frameworks, ever on the lookout for loopholes. The client’s problem becomes their problem, but the client’s feelings, anxieties and so on are soon forgotten. Expertise comes from the depth of knowledge and knowing how to apply it. They can become intrigued by problems that completely obsess them. People are not their thing – problem-solving excites them most.
These four types are derived from two factors. The first is whether the professional is client- or problem-centred. The client-centred adviser and counselor enjoy client contact, build strong relationships and measure their success by client happiness. That is the major focus of their decision-making. The problem-centred are more interpersonal, happy when they solve the problem elegantly. The specialist and the expert sell their expertise and their ability to come up with a clever answer.
The other dimension is about creativity, rule breaking and dependency. The adviser and the specialist work within their professional expertise. They concentrate on getting the information salient to their framework. They try to apply their knowledge to the problem. Counsellors and experts tend to be more lateral and less ego- and ergo centric. They are curious, observant and like to look for patterns. They are not scared to go beyond their remit.
Portfolio managers are in the serious business of decision-making: collecting and analysing data, and with the help of others making a decision. Whilst they are all doing the same thing how they go about their task may be very different with very different consequences. Some study the characteristics of the highly successful managers judged by their profitability over time. Whilst there are clear patterns what is apparent is that different styles can suit very different circumstances and clients.