Practical analysis for investment professionals
16 November 2016

Investment Decisions and the Divided Self

Investment professionals make difficult decisions based on incomplete information. That is part of the job.

But are we any good at it? And more importantly, do we achieve certainty when we make these tough decisions? The answer to the latter question — with great certainty — is no.

Absent conviction, we make decisions as a divided self. Social psychologist Jonathan Haidt describes our condition as follows:

“We assume that there is one person in each body, but in some ways we are each more like a committee whose members have been thrown together to do a job, but who often find themselves working at cross purposes.”

Is this just another new age idea? Not at all.

Plato wrote about his theory of the tripartite soul, consisting of reason, spirit, and appetites. Sigmund Freud described each of us as a bundle of drives — id, ego, and superego — that pulls us in different directions. Daniel Kahneman said the human mind is divided into two different systems. And David Hume famously stated, “Reason is, and ought only to be the slave of the passions.

Are We Beyond Help Then?

No, but the divided self has a huge influence on how we make decisions and how we learn — and learning is critical to success in the investment management industry. When we are open to learning, we can gather more valid information, make better investment decisions, and implement those decisions more efficiently. This, in turn, maximizes the value we deliver for clients.

But learning is tricky.

Even when we’re disposed to learn, 90% of us are defensive. We turn learning into a competition, seeking to outperform our peers while avoiding embarrassment and vulnerability. So we develop two different sets of values: values we claim to have and those that we actually use.

For example:

  • We value openness, but prefer that others not question us in ways we don’t like.
  • We know that to learn we have to acknowledge what we don’t know, yet we dislike not knowing.
  • We are responsible for our relationships, but prefer to blame others when things don’t work out the way we intended.

These divisions of self persist because they help keep our anxiety in check and reduce uncertainty.

Learning to Learn.

In an ideal investment organization, actions are determined by how they contribute to the generation of usable information. People aren’t striving to make themselves look good, but to gather data from the most competent sources and make well-informed decisions based on that data.

When a decision is made, the logic and rationale behind it should be fully disclosed and open to inquiry.

So how do we become better learners and investment decision makers? Here are four strategies that can help:

  • Values: We have to identify the values that underlie our goals. Start by determing the desired outcome. For example, the goal could be “excellent decision making to maximize value to clients.” The next step would be to identify the values that support achieving that outcome. What would be true for an organization that succeeded at that mission?  It would focus on the best interest of the client, openness, reliable information, free and informed choice, etc.
  • Behaviors: Values are useless unless we translate them into behavior. We have to explore the behavioral components that contribute to achieving that value. Then we have to learn these behaviors.
  • Feedback: Feedback is crucial to successful learning. An important part of that is using an “I” message: “When you do that, I feel like this,” or “I understand the situation like this . . . ” The “I” message reminds us that objective reality is filtered through our experiences and isn’t necessarily a true reflection. And it encourages those to whom we are giving feedback to share their perceptions.
  • Awareness: Our desire to be in control, to compete, and to acquire, as well as our reluctance to show weakness, ignorance, or to lose, are just a few of the obstacles that impede our learning. Feelings of jealousy and envy cloud our judgment and keep us from growing. By understanding what is holding us back, we can address these impediments and find ways — through mindfulness meditation, for example — to overcome them.

Whatever values we embrace and whatever paths we take to fulfill them, we must approach learning not as a linear process with a tidy finish, but rather as an ongoing, lifelong, and circular endeavor, one that recognizes and adjusts for the divided self.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images/DigitalVision Vectors

About the Author(s)
Mimmi Kheddache Jendeby

Mimmi Kheddache Jendeby joined State Street and the Center for Applied Research as a Senior Research Strategist in January 2015. She has over 12 years of experience in the asset management industry. Most recently, Kheddache Jendeby worked as a Portfolio Manager and the Head of Equity in the External Managers Team at the Second Swedish National Pension Fund (AP2). Prior to that position she worked as an analyst within the area of manager selection, and as a risk analyst within AP2. Kheddache Jendeby holds a Bachelor's Degree in Economics as well as a Master’s Degree in Industrial and Financial Economics from the University of Gothenburg; School of Business, Economics and Law. She also holds a Bachelor's Degree in Work and Organizational Psychology from the University of Gothenburg; Dept of Psychology.

4 thoughts on “Investment Decisions and the Divided Self”

  1. S. Alan McKnight, Jr., CFA says:

    A brilliant assessment of the internal “struggle” associated with the investment decision making process…

  2. Well done Mimmi. We need more discussion on this topic as we seem to be only at the beginning of dealing with these issues and they loom so large as factors in good decision making. I recommend Tetlock and Gardner’s Superforecasting for more on this.

  3. rajesh says:

    I like the concept you presented regarding investment and dividends.

  4. A very good article into the “insights of cognition” any good manager or generally speaking, any leader must exhibit.

    I’d go one further than Mimmi and also post that the same ego that drives us to excellence in our profession, is ALSO the ego we have to “restrain by zen” to make the best objective assessment of truth and investment reality in our tactical decision processes.

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