Slow and steady not necessarily the best way to go

‘The Hare and the Tortoise’, a well-known Aesop’s fable, does not have much in common with ‘An Imperial Message’, a less-well-known story from Franz Kafka, but combined they may tell us something about current reactions to the unsettling world which the global financial crisis has thrown investors into.

Some recent research shows just how much the human mind will unconsciously push back against thoughts and events which offend our view of the natural order of the world. We naturally escape back to our comfort zone, which is usually not a good place for a professional investor to be.

The research, by Dr Travis Prouix, of the University of California, Santa Barbara, and others, as reported on PsyBlog, an information service which promotes psychological studies around the world (www.psyblog.co.uk), tested the two stories out on people to gauge their reactions.

The Hare and the Tortoise, of course, illustrates that a steady and honest application to a task will win out against a less consistent and overconfident approach. This is exactly the way most people like to perceive the world. An Imperial Message, on the other hand, is a story about a messenger who has to get through with an important message but no matter what he does, he cannot. It’s an impossible task.

The researchers used measures of the participants’ cultural identity to gauge reactions and found that those shown An Imperial Message reacted by affirming their cultural identities more strongly than those shown The Hare and the Tortoise.

They further tested the groups with stories or images of absurd situations, including a sketch from the ‘Monty Python’ English comedy series and a picture of Magritte’s Surrealist painting of a bowler-hatted man with a big apple in the middle of his face. Similarly they found the absurd ideas prompted participants to affirm their beliefs and require something with more “meaning”.

It could be argued that something like this may well be happening in the investment world following the once-in-a-lifetime disruptions which have occurred to markets, countries and companies over the past three years.

The natural instinct is for investors to push back and look, perhaps too hard, for some meaning with which they can relate. They will therefore be more likely to dismiss events as not being ‘normal’ and therefore it is just a matter of time until the world gets back to what it was – and sooner rather than later.

But we just don’t know whether that is true. There are undoubtedly aspects of the financial crisis which have changed the world of investment for years to come, such as the myriad of assessments of risks and new controls over them. And perhaps there are aspects which have changed the world permanently, if that is possible.

The point is that investors have to be aware of their natural urges for order, as defined by the past (cultural) influences, and attempt to adjust for them in their decision-making processes.

Contrarian investors will have a natural advantage in this regard, as will those whose style thrives on volatility and change.

It is worth remembering that the investment management industry is probably the only industry in which contrarianism is a respectable way to do business. One would never be inclined, for instance, to hire a contrarian builder for your new house.

*Greg Bright is the Beijing-based publisher of Top1000Funds.com