Those who drive a Porsche invest less
Fund managers love to drive sports cars. This is not good for the return – this is shown by a study by financial market researchers from America and Singapore.
Autos reveal a lot about their owners. If a family carriage suddenly appears in the neighbour’s garage, one suspects that this is where the next generation is coming. If, on the other hand, a second Porsche is purchased, this indicates other priorities.
Stephen Brown, Yan Lu, Sugata Ray and Melvyn Teo, four financial market researchers from America and Singapore, wanted to find out more and asked themselves a simple question: What does a fund manager’s car say about his investment quality? Amazingly, much more than even staunch kitchen psychologists would suspect. You could roll your eyes and doubt the scientific nature of such studies.
But the fact that the journal of finance, which is highly regarded among financial economists, published the study speaks for itself. The result in short: the sportier and heavier the car a fund manager drives, the riskier he invests his customers’ money. This could possibly still be fine. The problem, however, is that this additional risk by no means pays off in higher returns. Instead, it is the fund managers with the boring car who achieve better performance despite a generally unexciting strategy.
In their study, the researchers calculated with a risk-return measure that says little to ordinary investors, the so-called Sharpe ratio. Finance professor Stefan Mittnik from the Ludwig Maximilians University in Munich has therefore taken the trouble to convert this information into concrete figures for the FAS. The result is striking:
Assuming similar fluctuations in portfolio values, fund managers with sports cars would currently achieve an average return of five percent per year. Money managers with supposedly boring minivans in the garage, on the other hand, achieve an average annual increase of 13 percent. Over a ten-year period, this means that the cautious increase wealth by a good 250 percent, while the more risk-taking fund managers only achieve a quarter of these gains.
Extramarital affairs and houses on credit
The researchers even succeeded in comparing the engine output and the performance of the funds: 100 additional horsepower then reduce the annual return by an average of one percentage point. Now one wonders how the scientists want to know exactly which cars individual fund managers drive. Their results are based exclusively on information from America, where it is freely available in public databases which cars are registered for someone. They compared this data with the names of around 1,100 American hedge fund managers, who can invest money a little more freely than normal administrators anyway. Unfortunately, it is not revealed which car brands the managers drive, the cars are classified as either sporty or solid and boring. But you can imagine that a Porsche doesn’t belong in the latter category.
But couldn’t it be that the fund managers are seduced into a riskier investment strategy by other financial incentives such as bonuses and that none of this has anything to do with their own car? The researchers rule this out through complex calculations and tests. According to them, the fans of fast cars among the managers are people for whom the term “sensation seeking” applies.
Such people are always on the lookout for intensive experiences and are more willing to take all kinds of risks for it. They usually do this largely regardless of the financial advantages or disadvantages associated with these risks. This special kind of passion is expressed on the autobahn in the fast sports car and on the stock market in a preference for strongly fluctuating stocks, for unusual strategies and for frequent buying and selling. Because all of this promises more excitement.
“Sensation seeking” also includes extramarital affairs. In a 2016 study by the Miami Business School, researchers found a link between cheating and the number of foreclosed homes. In 2015, the data of a dating platform for married people was hacked and then made public. The researchers evaluated them anonymously and found that people who tend to cheat more often finance their houses on credit.
The connection between the search for such experience and the willingness to take economic risk has been proven, but of course does not apply to every individual case. Nevertheless, it certainly doesn’t hurt to just listen to it. A little tip: Better to ask about the car than about the latest affair.