Why do investors place so much faith in “star” fund managers? As JOE WIGGINS explains, it could be partly down to a phenomenon researchers have labelled Identifiable Victor Effect.
In sport, when an individual has a spell of sustained success and dominance they tend to enjoy widespread support; think of the likes of Roger Federer, Tiger Woods or Usain Bolt. Although there are exceptions, people tend to want their runs of glory to continue. But when it comes to a team, the reverse is often true. Rarely does anybody but the fans of the New England Patriots or Manchester United want them to win.
This contrast has been highlighted in a recent paper by Jesse Walker and Thomas Gilovich, and they call this preference for continued strong performance from individuals over teams “the streaking star effect”. It is a phenomenon we can also observe in the investment industry, where we are often in thrall to the successes of a star fund manager.
Wonder and positivity
Walker and Gilovich carried out a number of tests to observe people’s preference for the continued success of an individual rather than a team. In a study, participants were told about awards given by the National Association of Police Organizations. In one scenario an individual won Best Homicide Detective four years in a row; in another Kansas City or LAPD won Best Homicide Department in four consecutive years. Participants had a significant partiality for the individual detective continuing his success over the departments. They also felt more “wonder” and positivity regarding their achievements.
Even when Walker and Gilovich tested their hypothesis using trivial or arcane events – such as the British Quizzing Championship or the Italian game Calcio Fiorentino — participants continued to prefer individual success to that of a team.
In another study, people also felt that companies were “deserving” of a greater market share if their success was framed as being as a result of individual brilliance of a CEO as opposed to a group effort. This feels intuitive, and it is easy to think of a number of contemporary examples of this.
Identifiable Victor Effect
What is driving this phenomenon? Walker and Gilovich acknowledge that is could be a variant of the Identifiable Victim Effect, where we are more likely to identify with and offer assistance to a specific individual, rather than a generic group. They label this Identifiable Victor Effect. Yet they suggest another driver — that we experience a greater sense of awe when witnessing individual achievements.
When we see persistent, individual success the responsibility and credit is clear — it belongs to them — and we enjoy seeing exceptional people pushing the boundaries of possibility. Furthermore, individual brilliance is fleeting and rare. When we attribute glory to the talent and ability of an individual by definition it cannot persist indefinitely. When it is a team or a group the success could be perpetual, and it is far more opaque and difficult to define. The story is harder to write.
Individual success is clear, comes with just rewards and is deserving of wonder. Group success can be overbearing, unfair and with no natural end.
Individual fund managers vs teams
Our fascination with star fund managers is inevitably linked to some of the issues raised by Walker and Gilovich. We laud and participate in the success of such managers (while it lasts), but seem far more likely to view the achievements of teams or firms with some level of scepticism and mistrust.
This creates something of a quandary for asset management firms. Star fund managers can do an incredible job of raising assets and are perhaps the most effective single marketing tool used to draw in investors. Team or firm-based approaches don’t have the same appeal, but do insulate a business against the loss or failure of any particular individual.
Being attracted to individual success stories also leaves investors vulnerable. Whilst we know that Rafael Nadal’s success is largely a result of application and skill; there is too much randomness in financial markets for us to unequivocally know that a streak is not just a run of good fortune. Even if a fund manager is skilful, the power of the narrative around them often leads us to make imprudent decisions. It is never a sensible idea to make investment decisions based on our admiration of an individual or our desire to participate in their story.
The lesson to learn
The lesson for investors is to be aware of the strong lure of streaking star fund managers, who catch the eye but so often burn out. We need to spend less time thinking about any given “exceptional” individual, and instead concentrate on our own objectives and the overall outcomes we want to achieve.
JOE WIGGINS works in the UK asset management industry. This article was first published on Joe’s blog, Behavioural Investment, and is republished here with his permission.
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