If investors want to make high-risk decisions, the prevailing view is they should block out emotions.
But new research says avoiding emotion is impossible.
Richard Taffler, professor of finance and accounting at Warwick School of Business, drew this conclusion after speaking with fund managers from the U.S., Europe and Asia in his new book Fund Management: AN Emotional Finance Perspective, co-written Prof. David Tuckett.
“Investors need to recognize that cognition and emotion go together,” says Taffler. “If you were coldly unemotional, then you wouldn’t actually be able to generate the conviction necessary to take the risk of investing.”
Investing, in particular, is impossible to perform without emotion since fund managers are under acute pressure to continually outperform, which often creates anxiety.
Fund managers cope by trying to understand a stock’s qualitative characteristics in addition to its quantitative ones.
“One of the fund managers talked about investing in a fast-food company; how he visited the restaurants and looked at what people were ordering. The story was about seeing something nobody else could see, and that feeling gave him the confidence to invest,” says Taffler.