The impact of individual-specific life experiences on risk-taking appears to have a significant effect on fund managers' risk tolerance. (Photo: Shutterstock)
When considering fund managers, plan providers look at many factors, but it's safe to say no one looks at a fund manager's childhood.
Except researchers. And what they found indicates that fund manager risk tolerance can be affected by a family disruption during childhood.
The resulting research paper, "Till Death (Or Divorce) Do us Part: Early-Life Family Disruption and Fund Manager Behavior," from SSRN reports that "fund managers who experienced early-life family disruption (death or divorce of a parent) are more risk averse" than those who have not.
This manifests itself in taking on "lower idiosyncratic, systematic and downside risk," as well as a tendency to sell holdings in the teeth of risk-increasing events, hold fewer lottery-like stocks and make smaller tracking errors.
This could be a good thing, since the paper also finds that such managers do not perform worse than fund managers who haven't experienced such a childhood upheaval.
The earlier in life the loss occurred (during formative years) or the more disruptive the loss (the death of a parent after which the bereaved parent did not find a new partner), the more risk averse the adult is likely to be.
The impact of individual-specific life experiences on risk-taking appears to have a significant effect, the researchers write, and "some experiences may cause cognitive biases that cannot simply be undone with education or training."
The study finds that managers who experienced such losses "reduce total fund risk by 17 percent (relative to the sample mean) after they take office."
In addition, those managers are more likely to sell a fund's holdings if there are risk-increasing corporate events, such as CEO turnover or mergers and acquisitions, or when overall market risk rises. There's lower turnover in their funds, but they don't differ regarding active share and stock picking.
And while there isn't a significant difference between the performances of managers who experienced early family trauma and those who did not, the paper concludes that it's still clear that "personal life experiences can affect the risk preferences and behavior of professional investors and hence the allocation of capital in financial markets."
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Marlene Satter
Marlene Y. Satter has worked in and written about the financial industry for decades.
