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Shorn of the edge - Arguably the scariest thing about investing is people’s ‘inner zombie’

30/10/2015

Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

From Edgar Allan Poe to Stephen King, Alfred Hitchcock to David Cronenberg, all the masters of the horror genre have known that what lurks inside the human brain and psyche has the potential to be far more terrifying than any ghoul, ghost or thing that goes bump in the night. Here on The Value Perspective, we believe the same holds true in investment. 

Whatever external horrors investors may have to face – crisis, crash, inflation, deflation, volatility, policymaker error and so on – they are as nothing compared with the possible threat to your financial future posed by the person you see in the mirror every morning or, more accurately, the undead caveman that lurks within. 

To help make our point, let’s consider the idea of ‘vestigiality’, which concerns human and animal traits – whether they be parts of the body or types of behaviour – that have lost all or most of their original function through evolution. The example most frequently trotted out in the case of humans is of course the appendix but the list of our vestigial traits is a surprisingly long one. 

The coccyx, for example, is vestigial evidence that something in our evolutionary past possessed a tail while, higher up, wisdom teeth are a remnant of our primate days when we had longer jaws. Oddest of all, perhaps, is the tiny dot humans have in the corner of each eye, which is all that is left of the third eyelid you still see in a variety of creatures, including birds, reptiles, sharks and even cats and dogs. 

Nor are human vestigial traits confined to parts of our body, they can also affect the things that we do. For example a human baby will instinctively grasp any finger placed in the palm of their hand. This ‘palmar grasp reflex’, as it is called – though it also holds true to a lesser extent with feet – is a throwback to a time when our ancestors would carry their babies around clinging to the fur on their back, much as monkeys still do. 

And when the hairs on the back of your neck stand on end as you hurry up a dark staircase to bed on October 31st your body is simply performing a tried and tested mammalian response when scared or under stress - to make itself look bigger. The fact that humans, or at least most of them, no longer have enough hair or fur to pull off this trick doesn’t matter, the behaviour endures nonetheless. 

When you start to think about it, some aspects of human vestigiality are obvious, some less so. Once you accept, however, that we all have certain body parts and behaviours that, rather than performing any useful purpose today, are legacies of our past, it is not much of a leap to think there may be other types of behaviours and instincts embedded within us of which we are less immediately aware. 

Hugely beneficial in helping human beings survive through our evolutionary history, such traits may not necessarily be so relevant or advantageous in the world today. Indeed, we have discussed these behavioural finance ideas or ‘heuristics’, including herding, confirmation bias and recency bias, many times before in articles such as What would Kermit do? 

The behaviours that helped keep us alive and out of predators’ jaws millennia ago can now, in an investment context, actively work against us – the portfolio equivalent, as it were, of a burst appendix but without the option of surgical removal. And the worst of it is, because these behaviours are hard-wired into our brains, investors are often having to work directly in opposition with their own instincts – their own inner investment zombie. 

As we said – terrifying.

Author

Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

I joined Schroders as a graduate in 2005 and have spent most of my time in the business as part of the UK equities team. Between 2006 and 2010 I was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010 I joined Kevin Murphy and Nick Kirrage on the UK value team.

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