Investment Results Of Human Behaviour

Ida Goldman was looking over the investment report that had just arrived and started to scowl and shake her head – NO! A week ago she had called a friend who was a very successful investor and asked him to review her investment portfolio, as she had hardly been making any money from it over the past several years. As she was fifty years old, she was getting concerned about retirement and her only other investment was her house that her investor-friend had interested her in buying. The report showed her how the mutual funds her broker had selected were greatly underperforming the market, and how a fund that copied the Toronto Stock Market would increase her return by 5% or how a choice of blue chip, high dividend stocks did even better. She did not want to think about it and did not communicate with her friend again.

Dirk Hasselthorpe was a millionaire owner of a successful small company and had brokers at two firms who managed his investments for a two-percent fee of his holding’s value plus commissions. While he did not pay much attention to his investments he eventually called in a recommended consultant to check over his holdings and report on how everything looked. She started by asking him how satisfied he was with how his holdings compared to the Toronto Stock Exchange. He said he knew nothing about any results. She found that getting the portfolio information from the two brokers was difficult but finally could report that his earnings were seriously below exchange returns for the past few years. She suggested that he and the two brokers meet with her to discuss her findings [he had high-fee Mutual Fund duds]. As the meeting ended, one of brokers agreed to ‘clean up her act a bit’ to increase his returns. The other broker remained noncommittal. Dirk cut the meeting short and dashed off. He did not have contact with his paid consultant again.

Now these people appear to be dumb investors considering their executive positions but are not at all unusual. A clear look at our understandings of human behaviour can clarify the picture and help fit the pieces together. All human behaviour has as its goal the satisfaction of some need or want, and investment activities like any other activity (eating, working, shopping, golfing) are the means of meeting these needs. Hence, people can play golf to beat the other players, get exercise, make or keep friends, do business, show off their expensive golf clubs and smart clothing, or make money in tournaments. A person I knew invested to show off, displaying how smart and successful he was as a stock broker. He put in a swimming pool, renovated his house, bought two BMWs, an antique convertible car and two ultralight airplanes. He drove the convertible and flew an airplane around the neighbourhood on Sunday mornings when everyone was home and could see him. This focus on fame and glory left him bankrupt, divorced and having to leave the country. It is easy for everyone with an apparent interest in creating wealth for future use to be diverted by other needs that can help or hinder.

Basic Human Needs

The framework for assessing needs that I have used in my teaching, writing and consulting is quite simple and is based on the key word REAPS. The letters stand for the five basic psychological needs that all of us share. These needs are: Recognition, Experience, Affection, Power and Security. These needs are based on the assumption that the physical needs of food, shelter and warmth are handled and not a concern at this time. However, the most well-known model of human needs is Maslow’s Hierarchy of Needs that is used here. Its five needs in order are: Physiological; Safety; Belonging; Esteem; Self-Actuation.

1. Security And Protection

An overload of security needs and concerns limits successful investing for wealth creation as it focuses candidates on guaranteed securities that pay low interest rates and are taxed at higher rates than other choices (no dividend or capital deductions). Over time high security needs usually abate but can return quickly with a recession or as a more expensive retirement than planned appears. Concern for economic security and protection usually spills over to needing investment rules and consistent, dependable order that motivates very structured planning. This planning can be following the rules for diversification, balance, asset allocation, foreign investments and dollar cost averaging. These activities can give a false feeling of being protected in the game and also limit investment selections. It appears that the G.I.C. group earn about 2-3% and those with fixed income Mutual Funds about 3.5-4%.

Too little concern about security can also have an impact on wealth creation with riskier choices selected as ‘the flavour of the month’ is razzle-dazzled in the media or as a big winner is whispered down the grapevine. Loss of job, divorce or retirement pension reduction can easily scare the pants off the investor and cause an overloaded need for security. The challenge is finding the appropriate security level as situations change over a lifetime. Of course, a solid level of security creates comfort at difficult economic times.

2. Belonging, Acceptance And Approval

Similar to the need for security and the other three major needs, the importance of belonging and acceptance rises and falls throughout life but clearly peaks during teen years. Membership in the group is often more important than school work or family rules and expectations. The group’s norms or rules for membership help shape adolescent development and can have a lasting impact on the rest of life. ‘Birds of a feather flock together’ and this is visible with changing trends in what investments the flock is buying. While belonging is often thought to be the most important need, its influence on wealth creation is mitigated as much of the investment activity here is conducted in private. However, when the activity is combined with high needs for power, relevance and recognition, the opposite is true.

Marriage/partnership helps with belonging and affection needs but in bringing two people and their primary groups into a close relationship with perhaps differing views and values about investing, it is useful to consider the impact. The geographical movement of people could also be a consideration. The norms or usual investments in Toronto, St. John’s, and Calgary may be quite different and especially between Mexico, China, Pakistan and Canada. As usual, these shifts in primary groups from the old country to the new group’s usual ways of doing things may help or hinder wealth creation. These differences are well illustrated by the following globefund.com 10-year report to 1/1/13 of Canadian Mutual Fund average earnings: Fixed Income 4.4%; Global Equity 2.6%; Balanced 5.1%; Canadian Equity 6.9%. And for comparison the Toronto Stock Market earned 9.2%.

3. Self Esteem, Independence And Power

These needs lead to more fun, adventurous new experiences, empowerment and proud feelings about one’s self. They also open up more investment choices and flexibility with a sense of being the ‘boss of my own self ’ autonomy, resulting in higher accomplishments in creating wealth. As time passes these needs usually increase as employment income and relationships stabilize, empowerment and new adventures lead to vacations and travel experienced, cottage and vacant land purchased, boat and all-terrain vehicles rented, health clubs, golf, bridge, and investment clubs joined.   Some of these activities are good financial investments and hopefully all contribute to an increased understanding of the investment world and help in personally managing it. Thus a few more investors will know that in the past 22 years, China—"the place to invest”—has had an average annual increase of 2% in its stock market. They are also assessing the real value of RRSPs and Mutual Funds and exploring Tax Free Savings Accounts and Exchange Traded Funds as better investments.

These new lifestyles and the broadening of investment knowledge and understanding while creating better practices and more successful returns can be difficult for some investors to manage with the strengthening needs for autonomy, power and prestige. The lust for power and fame may become addictive and lead to risky and autocratic investing. While a few make it into the top 2% of wealth in Canada, many flame out, losing friends and public acceptance, or go bankrupt as illustrated by my two-airplanes, two-BMWs acquaintance. An extreme range of wealth creation is the picture here and my hunch of a median earning figure (what people half way from the bottom to the top of annual wealth earnings make) is 8 to 9% for the past ten years.

4. Self Actualization

Self-actualized people are described as having achieved their full potential or at least having the competence to make full use of their potential by balancing their five REAPS needs to maximize their contribution to the person’s life and usefulness to society. It means that these people have found comfortable behaviour to manage and adjust these five needs in wholesome and constructive ways to be utilized in achieving life’s goals. More simply, actualized investors are able to shift the priority and ways of managing their basic personal requirements and expectations to deal with the changing pressures and challenges throughout their lives. Good examples come from the investment strategies associated with education, employment, marriage/partnership, children, health issues, recreational expectations, death of parents, family and friends, and, of course, retirement. Managing money is usually the biggest issue resulting in divorce in Canada. And “the sooner you start saving money for your kid’s education the better” rule certainly can get this conflict started early in relationships.

Summary

This article has focused on looking at the different ways people use their investment activities to satisfy the basic need we all share, and in many cases creating wealth is not the priority. Like food, employment and hobbies, there are a wide range of needs being met in these and most other activities. We confirm this observation quickly when we count the number of different investment choices people make, and examine why people are buying every stock that someone else is selling,   While we may think of the Toronto Stock Exchange as the benchmark of an appropriate dollar return on investments, very few people have it as a major investment and instead own Mutual Funds that average 2% lower earnings with only 7% of them beating the exchange over a five-year period. When you are asked if you are satisfied with the dollar earnings of the holdings in your RRSP or self-directed retirement fund and you say no, you now have another perspective on why you have simply not used David Stanley’s Beating the Toronto Stock Exchange portfolio. It has averaged 12.5% earnings for the past 26 years and is featured in this publication. Understanding the investment results of human behaviour can be more useful than a page of investment rules.

Hedley Dimock, M.A., Ed.D., Guelph, ON.

hdimock@teksavvy.com