Do you need to be a psychopath to be a successful investor?

Wednesday, Sep 17 2014 by
Do you need to be a psychopath to be a successful investor

One of the key points from my presentation at the Stock Market Show on Saturday is that investing successfully requires buying things most others shy away from. In fact, taken to the extreme it requires investing completely contrary to the best of human nature. Most normal, well adjusted people act socially, hang out with others and like to do the same things. But in markets, it pays off to behave completely differently - avoiding social consensus, seeking discomfort and venturing where others fear to. In fact, one study suggests the best investors may have more in common with psychopaths than well adjusted people.

Functional Psychopathy....

A 2005 study by researchers at Stanford Graduate School of Business illustrates this point very clearly. A coin flipping game was set up that bankrolled each participant with an initial $20. Each was asked to stake $1 in sequential rounds of a coin flip - if it landed heads up, they won $2.50, if it landed tails up they lost their stake. They could choose to sit out any round at will.

Everyone knows that flipping a coin offers a 50% chance of success... so the logical choice in this game would be to take part in every single round. After all a win makes you £1.50 better off and a loss only $1 worse off. On average a player would be $0.50 better off after every couple of rounds. One might expect most of the players to just play every round... but alas it seems most people did anything but...

On average players only invested in 58% of the rounds - they let their emotional response to bankroll fluctuations and the randomness of outcomes get in the way of logic. Fear and anxiety had crippled their returns.

The Price of Fear...

But even more extraordinary was the result when a set of brain damaged players were tested. A set of players were chosen who had lesions to the parts of the brain that hindered basic emotional responses such as fear and anxiety.

These participants ended up taking part in 83% of coin-flipping rounds, and ended up with 13% more money than their 'clear' minded colleagues. What these results illustrated quite clearly was that players that reacted less emotionally to losses were more willing to take risks with higher payoffs.

One of the authors of the study Professor Antoine Bechara of the University of Iowa was quoted as saying:

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31 Comments on this Article show/hide all

Edward Croft 18th Sep '14 12 of 31

In reply to post #86267

I don't think we've ever suggested that you should just go and buy a stock because it's cheap - that's a crapshoot. The point is that there's been a generally market beating return in the stock market, over nearly every 3 year period in the last 50 years to buying diversified baskets of deep value stocks. The value premium has been massively well studied starting from Ben Graham - and implemented by all Graham-ite investors since with great success (with people like Buffett being some of the most successful adherents to his strategies).

Of course the market is much better educated than it was 50 years ago - Buffett himself found that bargain stocks became harder and harder to come by so he switched in the 80s to buying good stocks at cheap prices.  (For an illustration of how hard it is to buy bargains - just check out the list of stocks in the Graham Net-Net strategy - it's a terrifying list).

The nasty drawdowns associated with buying solely cheap stocks (which are mostly problem stocks) can be somewhat mitigated by buying the 'best' companies in the cheap basket. That's the entire focus of strategies like the highly successful Piotroski F-Score strategy, or Greenblatt's Magic Formula, and it's been studied at length in books like Quantitative Value (highly recommended for geeks). 

Certainly though, what we've found to date with the ValueRank - which has been greatly inspired by James O'Shaughnessy's Value Composite detailed at length in his book What Works on Wall St - is that the cheap basket has significantly outperformed the expensive basket.  This is in line with the findings in academic research studies... the decile spread is very telling - the market won't always behave like this - indeed in 1999-2000 these results would have completely inverted.   The point I'm making is that to have beaten the market in the last 18 months, there was a far higher probability if you bought cheap than bought expensive.


I'm personally most interested in WHY value should work at all - the market is supposed to be efficient but clearly it's not.   If it was efficient you wouldn't see these results - everything would hug the index. The reason it works, in my opinion, may be several:

  • Risk based - Value stocks are risky and people get paid for taking on more risk.
  • Statistical - the stock market has a tendency to mean revert.
  • Behavioural - People avoid cheap stocks, and overpay for glamour stocks.

I find it very telling that everyone here is picking on my comments on value - rather than the comments on momentum or quality.   It seems that everyone has a view on cheapness, but rarely consider why other factors might work.  I can cite lots of papers that dig into the reasons why quality or momentum 'work' as investment strategies... but the common thread through them all is behavioural - and it's this common thread that interests me as a framework for sensible investing.

Personally I can't put my faith in risk based or statistical reasons why strategies work.  What I can put my faith in is the understanding that certain strategies profit from the follies of others.  If I fundamentally know that the  majority of participants in the stock market make systematically bad decisions (due to structural/institutionally poor investment decision making and poor market timing) then I can have strong conviction that one can design a strategy to systematically invest in what they are leaving on the table.   One must have a foundation of strong conviction in order to continue investing (or not) when others are running for the exit (or piling in).... personally I find it helpful but appreciate it's not for everyone.

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ExpectingValue 18th Sep '14 13 of 31

In reply to post #86270

Spot on, Ed.

On a side note, I actually think the net-net strategy has more problems now than it did when Graham suggested it - asset valuations are more ambiguous and accounts often more fraudulent, so I wouldn't touch many of those companies.. but the underlying logic is sound.

Anyway, I'm a stockpicker, and I hope I'm a good one, but I'm entirely open to the possibility that in ten years I discover a rules-based strategy; one that takes my inherently subjective value judgements and emotionality and replaces it with cold, fast rules, would have performed better than me. It might well be that I fall prey to exactly the same mistakes that make value work in the first place - I run away from the really cheap stuff, I look for validation in high stock prices, I can think of a million reasons to hate a company when everyone else does and search for confirmation bias when things are rosy...

Do I think someone with a disregard for empathy and emotion would do better than average? Probably. The best investors I can think of, though, are exactly the opposite - they strike me, in my limited experience, to be wise assessors of people and emotion as well as analytical minds. This might make sense if we suppose that the real fundamental reason for outperformance is exploiting psychological biases; the stock tickers and price movements are just expressions of that.

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intuitive6191 18th Sep '14 14 of 31
"I find it very telling that everyone here is picking on my comments on value - rather than the comments on momentum or quality."

Probably not that surprising since you have filed the original article under value investing and referenced Graham a number of times.

"Buffett himself found that bargain stocks became harder and harder to come by so he switched in the 80s to buying good stocks at cheap prices."

One key reason that Buffett moved away from a pure Graham approach was that he was buying cheap stocks that stayed cheap and never realised any value. Hence he adopted the ideas of Phil Fisher into his strategy.

With due respect I dont think that this was a very good article to showcase the workings of Stockopedia. Psychopath is a word with very negative connotations and I dont think it works to try and suggest that it has any investment virtues.


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Edward Croft 18th Sep '14 15 of 31

In reply to post #86278

Psychopath is a word with very negative connotations and I dont think it works to try and suggest that it has any investment virtues.

While I respect your opinion,  I personally find it much more interesting to write about challenging subjects as it makes me think - and I think it makes others think too.   I once wrote about index funds being parasites which inspired a very polarised debate on this site.   I can drone on about practical topics if that's what people prefer, but my experience is that challengingdebate and discussion is far more enlightening.  It crystallises more feedback.   

As Charlie Munger has made very clear - successful investing is about building a latticework of mental models.  Personally I seek to join the dots, and understand things from a wide range of angles... to understand the required investment mentality using all the analogies I can - Spock, left-brain, System-X, Functional Psycho... it all helps. 

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timarr 18th Sep '14 16 of 31

Hi Ed

Interesting, but I don’t agree that Damasio’s research into brain damaged coin flippers is indicative of psychopathic traits being positive for investors.

Firstly Damasio’s research doesn't lead to the conclusions you might expect – the results of his Iowa Gambling Task experiment suggest that while brain damaged participants don’t exhibit the same emotional traits as uninjured people – so they don’t seem to suffer from loss aversion, the disposition effect, etc – neither do they seem to learn from experience. This isn't a big surprise – if you drive around a bend in the road too quickly you get an emotional charge which hopefully will make you take the corner more carefully. However, similarly brain damaged people don’t get the emotional feedback and don’t change their behaviour.

Secondly, equating a brain damaged individual, no matter how emotionally impaired, to a psychopath is wrong. A psychopath is not emotionless – they don’t care very much about what other people feel, but they’re very concerned about their own happiness (however deranged their definition of that term may be).

From long observation I’d suggest that the best investors are probably more likely to be highly focused people somewhere on the Asperger’s scale. So they don’t have a great concept of theory of mind (i.e. the ability to understand what someone else is thinking or feeling) but they do have great powers of concentration in areas that interest them. That, I suspect, is a very good combination for an investor, but means they're more likely to bore you death with data than eat your face off.


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emptyend 19th Sep '14 17 of 31

In reply to post #86284

From long observation I’d suggest that the best investors are probably more likely to be highly focused people somewhere on the Asperger’s scale. So they don’t have a great concept of theory of mind (i.e. the ability to understand what someone else is thinking or feeling) but they do have great powers of concentration in areas that interest them.

Interesting. I have a couple of relatives to whom that might apply - and the difference in their engagement level between things that interest them and things that don't is just immense.

But neither of them show the slightest interest in equity investment - and generally regard it as far too risky. They also lack the analytical tools.

....but they do care about saving money!  If you want to find the best bank account to half a basis point ....or to minimise the cost of your shopping at a well-known supermarket by judicious mixing of discounted BOGOF products in a particular one-hour per week timeslot, then they are just all over it! The exponent of the latter skill is a family and Facebook legend.

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Guzziman 19th Sep '14 18 of 31

Secondly, equating a brain damaged individual, no matter how emotionally impaired, to a psychopath is wrong. A psychopath is not emotionless – they don’t care very much about what other people feel, but they’re very concerned about their own happiness (however deranged their definition of that term may be).

Absolutely Timarr.

There are many brain misadjusted people or those who have allowed their brains to skew ideas in an unusual way.

Genii such as Einstein did not think in the usual way.

But this, per se, would not give them an edge when it comes to picking stocks.

Some interesting research is appearing concerning the DBN or default brain network. Which describes how our brains function when in dormant mode or not actively being used for problem solving, for example.

A result of our brains finding something to do?

Our DBN's could be correlated to potential irrational market sentiment but this is merely musing?

Maybe we should teach our brains not to think when not needed, as this can create behavioural biases that may lead to throwing the baby out with the bath water?

IMHO you can only really understand this cerebral behavioural stuff if you have been able to recover from psychological challenges in order to see the bigger picture.

Think sentiment plays a massive correlation with market miss pricing.

Is there a correlation between sentiment and momentum when it comes to Mr Market?

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tournesol 19th Sep '14 19 of 31


have to respond to your bizarre comment.

Einstein was clearly neither psychopathic nor brain damaged.


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tournesol 19th Sep '14 20 of 31

I am surprised by the significant resistance expressed here to the basic thrust of Ed's opening article. AIUI there is plenty of evidence/opinion to the effect that psychopaths tend to do well in business, politics and other walks of life and often achieve senior positions. They are helped in this by the characteristics that derive from their psychopathic condition.

Mr Google is full of material about the incidence of psychopathic tendencies and their disproportionate incidence in high achievers.

I worked for one boss who displayed most of the characteristics associated with psychopathy, including bullying, narcissism, manipulative behaviour, lack of inhibition, breaching legal and ethical standards, etc etc etc . He was a director of a PLC at the time. He routinely bullied everyone in his team and I found him impossible to work for and left the company. He went on to bigger jobs in bigger companies and ended up in a very very senior position and with a string of non-exec positions. What frightens me is that he now exercises significant influence over a company where safety risks are very substantial and the consequences of accident or failures would be catastrophic. Do I think he can be trusted to exercise restraint if there is a conflict between what's good for his bonus/career and what's good for the rest of us|? Absolutely not.

Another very well known public figure appears on TV and radio frequently and is generally seen as a national treasure. I've crossed his path twice*** and view him as possessing very strong psychopathic tendencies which make him quite unfit for his position/role. Some of his staff have expressed similar views.

*** First time was in private where his behaviour towards my wife - we were consulting him on a professional matter - actually led me to consider giving him a bloody nose - Fortunately I managed to restrain myself. Second time was in court on an entirely unrelated matter - The manipulative and dishonest evidence/opinion given by this second man clearly influenced the judge and the final outcome was clearly unjust.

So, I have no difficulty accepting that there are psychopaths amongst us. And it seems entirely reasonable that the characteristics that enable them to succeed in organisations might also assist them in investment.

There is another issue that comes to mind. How do we as investors deal with the risks that arise from investing in companies which are being managed by psychopaths? An easy example is Robert Maxwell but the banking crisis has exposed plenty of other examples of apparently psychopathic behaviour. Do I want to invest in a business run by people who have no moral scruples and no inhibitions? Obviously not. And yet I have once or twice done just that.

I have always invested time and effort in getting to know the management of the companies I invest in. On at least two occasions I have been taken in by people whose subsequent behaviour was palpably dishonest/criminal. The lesson for me is that I should expand my focus to consider not just whether the management is professional and competent but also whether they are psychopathic/dishonest and prone to rip me and others off.

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PhilH 19th Sep '14 21 of 31

Surely one has to start with a definition of 'successful'

Phil (Long on Gorillas)

Professional Services: Sunflower Counselling
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Edward Croft 19th Sep '14 22 of 31

In reply to post #86296

Tournesol - great to see that the general 'thrust' of the article is sparking debate and thanks for arguing the alternative side. Indeed a quick google finds plenty of references to psychopathy and leadership - such as this Forbes article.

Interestingly enough - the spark for my article came from reading through the great Joel Greenblatt's Columbia University "Value & Special Situation Investing Course"  notes.    He mentions the study in the course and makes the link between psychopathy and great investors like Richard Pzena (who then takes the next class !).   So I thought I'd riff a bit further on the theme... 

If it's good enough for Greenblatt then... 

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timarr 19th Sep '14 23 of 31

I appreciate, of course, that equating investors to psychopaths is likely to trigger a visceral response amongst many readers. That's not the point I'm making: the problem is that there is no evidence to back up the assertion that psychopathic tendencies are beneficial to investors. If anything the evidence suggests the opposite.

Firstly I'm not questioning the link between management success and psychopathy. The types of behaviour described by tournesol are well documented, I've even written about it myself: Is Your CEO A Psychopath? They are deceitful, manipulative and, on occasion, downright dangerous.  However, no-one has yet suggested that those particular skills are the ones needed to make a good investor. 

Moreover it is disingenuous to link brain damage and psychopathy. I assume that the study you're quoting is Investment Behavior and the Negative Side of Emotion by Baba Shiv and colleagues. You will search that paper in vain for any mention of psychopathic behavior. It's not there.

In fact the idea that this paper is somehow linked to psychopathy comes from an interview given by one of the researchers,Antoine Bechara, who suggested that successful investors might plausibly be described as "functional psychopaths". There doesn't appear to be any real evidence for that soundbite: Shiv himself has gone no further than agreeing that people with better control of their emotions are more likely to be better investors: I doubt anyone would disagree with that.

A study in 2010 suggests that psychopaths are hard-wired to seek rewards at any cost: they take almost no account of risk in their behaviour:Mesolimbic dopamine reward system hypersensitivity in individuals with psychopathic trait.This is similar to day trader behaviour that's also been evidenced in other studies, but it seems highly unlikely that an overwhelming and uncontrollable urge to win at any costs regardless of risk is a good investing trait. 

In short - a throwaway comment referencing "psychopaths" by one of the researchers associated with the coin flipping study has been exaggerated into a theory that psychopathy makes for a good investor. The evidence presented in the article doesn't back up that theory. I've looked but I can't find any alternative research that does either, rather the opposite.

Of course, if this was triggered by Greenblatt then this may be an example of a different sort of investment bias - deferral to authority. Rule #1: question everything. Rule #2: don't forget Rule #1.


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Edward Croft 19th Sep '14 24 of 31

I didn't come up with a theory - merely asked the question "Do you need to be a psychopath to be a successful investor?"  - fantastic to get such a diverse set of answers from so many erudite and esteemed investors.

I feel that rather than getting caught up in the taxonomy of mental states, perhaps we should focus on what we all agree on - that a certain emotional detachment often makes for better portfolio management ?   

Most people who think about these things a lot generally agree that the optimal state of mind required is more akin to Spock's than a Psychopath's... but even then I feel we should defer to Hollywood who can generally see the similarities between the two in their casting approach.


Which of course naturally leads to the obvious conclusion that Zachary Quinto should play the young Warren Buffett in the upcoming Hollywood epic "The Snowball".  Over and out !

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Heisenberg 19th Sep '14 25 of 31

In reply to post #86256

For me the key word used above is patience - patience to stick to your original decisions when nothing new has caused a change in the investment case. Ignore the short-term noise in the share price and remain focused on the fact that owning shares is part ownership of a business. Avoid selling out and switching just because another share price has gone up so it "must be time to get on board" - all the classic mistakes of overtrading, buying at the wrong time. However, to be patient and confident in what you are doing, even though the it can be uncomfortable at times, I do believe that finding a niche or specialisation in certain sectors helps enormously. I have certain criteria I look for in any investment but for me a strict rules based approach does not suit my style - for others it may work. Conviction is also important - if you really believe in a company and it is attractively priced you have to be prepared to back your judgement - that can be a key factor in outperformance.

Buffett is quoted a lot so I like to look at other examples - this is one from Crispin Odey which I appreciate:

“To be a successful long term investor you must think like an owner – know when to take risk and when to preserve capital." He also has another quote about the need for "a thick skin"

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emptyend 20th Sep '14 26 of 31

In reply to post #86307

I do believe that finding a niche or specialisation in certain sectors helps enormously 

I like to think so too - but have found myself in the position of having some expertise in a sector which has now been out of favour for about 4-5 years.....which ain't ideal ! ;-)

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Heisenberg 20th Sep '14 27 of 31

In reply to post #86313

Please let us know which sector, it may be time for a positive turn.....

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emptyend 21st Sep '14 28 of 31

In reply to post #86314

Oil E&Ps Heisenberg. Check my other posts for a flavour.


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tournesol 21st Sep '14 29 of 31


yes, I smile ruefully at the mantra that investors should be patient and take a long term view - that's what E&P investors have been doing for ages and ages. The fact is that the tide has fallen in this sector and many many boats have been left high and dry. Those which have remained afloat have found themselves suffering from the results of sector aversion as investors shun the whole fleet.

Thank goodness for my non oil sector investments.

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emptyend 22nd Sep '14 30 of 31

In reply to post #86316

It appears that institutions generally regard E&Ps as trading bets on the oil price or geology bets on drilling programmes - and are thus in and out of the shares relatively often.

What they don't seem to do is pay much attention to income (except at the majors).

That said, it seems generally to have been the case that the industry's capability to find and develop new fields has been pretty poor in recent years - though I would say that capital rationing imposed on E&Ps certainly hasn't helped, post-2008 financial crash.

There is likely to be a reckoning for this at some point - if oil supply falters through some political or geological (Ghawar) event, then the market will pretty soon realise that there is no short-term fix for a supply gap....and we could see another 5 year rally in the sector.

If, of course, demand falls faster than supply then the institutional caution may turn out to be broadly right.

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tournesol 22nd Sep '14 31 of 31

In reply to post #86318

Morning EE

quite so

which is why I have never been a sector investor or an investor in a random cross-section of E&P's but have always tried to select specific stocks which had stronger positions than their peers. These used to work out pretty well but in recent years even when the analysis was good, the outcomes expected have mostly not materialised. Though to be honest one of the things that has emerged - at least in my field of vision - is the awful realisation that many management teams are clueless about cash-flow and management of capital. There seems to be a tendency to focus on the geological prize and the operational outcome and pay far too little attention to managing the funds that are needed to keep the business afloat. In several cases the outcome has been an early bath with the baby disappearing down the plughole and shareholders getting soaked by the splashing.

For me the game now is to find those companies that have production which generates the cash needed to fund exploration indefinitely and ideally have enough left over to pat dividends to boot. Did someone mention Soco?


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