Beware of Nervous Fund Managers

When it comes to mutual-fund managers, the adage may be true: No guts, no glory.

Investment professionals who are too scared about losses tend to perform more poorly overall, hurting both their investors and their own careers, contends a soon-to-be published study.

As a result, fund companies should be doing more to screen prospective managers on the degree of their “loss aversion,” say the authors of the study, Andriy Bodnaruk of the University of Notre Dame and Andrei Simonov of Michigan State University and the Gaidar Institute in Moscow.

A caveat: The study is based on a survey of fund managers in Sweden, a country the authors have found to be fertile ground for their studies because it opens up managers’ private data, including personal tax records and investments, to the public. But Dr. Bodnaruk says the findings are applicable anywhere because they’re about human nature, not about where people live.

The Cost of Caution

Dr. Bodnaruk points to a flaw in hiring: “Managers are hired based on their past performance, experience in the industry, pedigree and other factors, but to our knowledge their ability to stomach volatility of their portfolio returns is never under consideration.”

Read the entire story on the Wall Street Journal website.