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“We see what we want to see. Overcoming bias is a big step forward to investment success.”
In a roundabout way, the Republican presidential debates could make you a better investor.
The key is realizing that your assessment of the candidates’ performances is a function of your prior political beliefs. If you support Nikki Haley, for example, you believe the attacks from Ron DeSantis did nothing to stem her momentum. If you support DeSantis, in contrast, you celebrate his strong performance and declare him the debate’s winner. And if you support Donald Trump, you view the entire debate as an unfortunate sideshow on the road to his inevitable nomination.
You see what you want to see, in other words. Overcoming your bias requires reaching out to those you disagree with, really listening to their perspectives, being open to new information and being humble enough to change your mind.
Your portfolio’s performance is likely to improve if you apply these lessons to your investment decisions. That’s according to research out of the University of Chicago that analyzed the effects of political partisanship on investment performance. The study, entitled “Costs of Political Polarization,” was conducted by Matthew Vorsatz as his Ph.D. dissertation.
Vorsatz reached his conclusion by analyzing three different groups of U.S. equity mutual funds. The first group had management teams whose members were predominantly, if not exclusively, Democrats, while the second group were managed by homogenous Republican-identified teams. The third group’s management teams were non-partisan and politically neutral.
His key finding is that, at least over the period he analyzed, “partisan fund teams — whether Democratic or Republican — have lower fund returns… than non-partisan teams.”
Vorsatz next searched for possible explanations of this difference, and concluded that a likely cause was that non-partisan teams are “more cognitively and ideologically flexible.” That confers a significant advantage, since cognitive flexibility leads to “better processing and reacting to new information.”
“ Political polarization has become so extreme that even investment professionals have succumbed to its toxic effects.”
This research suggests that political polarization has become so extreme that even investment professionals have succumbed to its toxic effects. Prior research had found results similar to Vorsatz’s for retail investors but not for institutional managers.
Many speculated that, in contrast to retail investors, institutional managers were “financially sophisticated, strongly monetarily incentivized, and frequently evaluated against a benchmark.” Vorsatz’s research suggests that these factors are no longer strong enough to resist the consequences of political polarization and partisanship.
The implication of Vorsatz’s research is that you should not conduct your investment analysis alone in the echo chamber of the internet. Online you will always be able to find myriad reasons why you’re right — even as you’re losing money.
Instead, you should regularly discuss your investment ideas and beliefs with those whose political beliefs are opposite of yours. For example, investors who support President Joe Biden’s re-election should run their investment ideas by fans of former president Donald Trump. Similarly, Trump supporters would likely improve their performance if they first discussed their ideas with Biden supporters.
Given the current extreme polarization in the U.S., reaching out in this way is likely to be the last thing you want to do. But is stubbornly holding on to your partisanship really more important than your investment performance?
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
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