Contrary to stereotypes, study of hedge fund managers finds psychopaths make poor investors

If you're a psychopath who's good with numbers, you could make the perfect hedge fund manager. Your lack of empathy will allow you to capitalise blithely on the financial losses of others, while your ability to stomach high-risk, but potentially high-return, options will send your fund value soaring…. Well, that's the story that's been painted by popular media, folk wisdom and Wall Street insiders alike. The problem, according to a new paper in Personality and Social Psychology Bulletin, is that hedge fund managers with psychopathic tendencies actually make less money for their clients.

Dacher Keltner at the University of California, Berkeley, and his colleagues analysed videos of semi-structured interviews with 101 hedge fund managers, whose firms each managed between US$40 million and US$1 trillion in assets. This money generally came from institutional investors, such as insurance companies and public and private pension funds.

The videos had been recorded between 2005 and 2015 by an investment advisory firm, to act as a marketing tool, and to give existing clients market updates. They followed a set format with the interviewer asking questions like, "What is your outlook on opportunities in the current market?" and "What is your philosophy on risk management?"

The researchers were looking for non-verbal evidence in the hedge fund managers' replies of the so-called Dark Triad personality traits of narcissism, Machiavellianism and psychopathy. Erratic emotional expression, for example, was taken as a signal of psychopathy. A dominant positioning of the jaw and posture were among the signals of Machiavellianism. Flashy clothes, coy looks, and excessive use of "I" rather than "We", were among the indicators of narcissism.

Keltner and his colleagues also analysed the financial performance of each manager's so-called "flagship fund" – usually the largest fund offered by the company, and the one considered to most reflect the individual manager's investment process – during the ten-year period that the videos were recorded.

Machiavellianism had no bearing on performance. Narcissistic hedge fund managers had to make riskier decisions to make the same returns over a given period compared with a less narcissistic manager; as far as an investor is concerned, this would manifest as greater volatility in the value of their investments.

When it came to psychopathic tendencies, however, the results were more clear cut. For managers who displayed psychopathic tendencies at a level of one standard deviation above the mean, an investment of US$1 million earned US$1,161,694 (15 per cent) less over the course of ten years, on average, compared with a manager who ranked average for psychopathy. More extreme psychopathy led to even weaker returns. For example, the same US$1 million investment by a manager who rated two standard deviations above the mean for psychopathy earned 30 per cent less, on average.

This is the first time that the Dark Triad traits have been investigated in the context of hedge fund performance, and unfortunately the study doesn't reveal the reasons for the counterintuitive results. It may be that, while the individual managers led the hedge funds, innovative ideas from team members are important for effective financial investing – and the more bullying style of managers with more psychopathic traits could have stifled this kind of creative, collaborative thinking.

While the findings suggest that investors would be wise to avoid managers with psychopathic and narcissistic tendencies, there are some limitations to be mindful of. The financial data were from a period that included the Global Financial Crisis and the researchers can't rule out the possibility that Dark Triad traits may be advantageous in other, less financially disastrous, contexts. Also the non-verbal coding procedure – although it's a valid measure according to earlier research – provides only a rather coarse indication of personality traits.

It's worth noting that the results tally with another recent study (on which Dacher Keltner was also a co-author), that found US senators with psychopathic tendencies received less support for bills they had proposed. "These two studies, clear examples of real-world performance, cast doubts upon the efficacy of a Dark Triad-based approach to wielding power," Keltner and his team concluded.