Study Examines Herd Mentality in Pension Investing


Pension funds exhibit a herd mentality when formulating investment strategies, according to a new paper that studied the investment decisions of UK pension funds over the last 25 years.

The paper, authored by David P. Blake, Lucio Sarno and Gabriele Zinna, claims that pension funds “display strong herding behavior” when making asset allocation decisions.

More on the paper’s conclusions, from

According to the study, there was overwhelming evidence of “reputational herding” behavior from pension funds—more so than individual investors.

Pension funds are often evaluated and compared to each other in performance, the paper said, creating a “fear of relative underperformance” that lead to asset owners picking the same asset mix, managers, and even stocks.

Data showed herding was most evident at the asset class level, with pension funds following others out of equities and into bonds at the same time. They were also likely to herd around the average fund manager producing the median return—or a “closet index matcher.”

The paper can be found here.


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Netherlands Regulator: Some Pension Funds Not Doing Enough to Manage Conflicts of Interest


The Nederlandsche Bank (DNB), the entity that regulates the Netherlands’ pension funds, is concerned that some pension funds have not implemented adequate policies protecting against conflicts of interest.

From Investments and Pensions Europe:

Most pension funds’ boards pay insufficient attention to potential conflicts of interest of policy makers, pensions regulator De Nederlandsche Bank (DNB) has suggested.

It indicated it was not satisfied with the outcome of a sector-wide survey, during which it checked whether schemes had conducted a risk analysis or had formulated a policy on conflicts of interest.

DNB concluded that a large number of pension funds had not conducted an analysis, and had at best a policy that was not based on such a risk assessment.

Additionally, it found that many schemes did not declare and register the main functions and jobs on the site of board members and other decision makers, and did not have a view on their private interests either.

However, almost all pension funds had rules in place for how to deal with gifts, according to DNB.

In its opinion, merely a handful of pension funds fully managed the risks posed by conflicts of interest.

The watchdog commented that conflicts of interest could lead to “impure decision-making, which could harm pension funds”. Therefore, trustees must actively fight conflicts of interest, it said.

DNB added that, during discussions with trustees, it had noted that the subject is charged, and that the sector needed clear examples as to what constituted a conflict of interest.

DNB now says it will come up with a list of “good practices” for combating conflicts of interest.

What Types of People Should Manage Institutional Money?

institutional investors

What traits does it take to be a successful manager of institutional money? A high IQ? A steady temperament? A penchant for going on lucky streaks?

Jack Gray, of the Paul Woolley Centre for Capital Market Dysfunctionality at University of Technology, Sydney, dives deep into this question in a recent article published in the Rotman International Journal of Pension Management.

From the article:

Successful investors are likely to be overweight on several the following traits:

• A paradoxical blend of arrogance, to discover and arbitrage opportunities ahead of the market, and humility, to simultaneously be skeptical about those discoveries.

• A commitment to the principle “know thyself” – for instance, recognizing when previously justified contrarianism has degenerated into unjustified stubbornness.

• The ability to make effective decisions under uncertainty, ambiguity, and pressure. A temperament that seeks comfort and stability will likely be ill-suited to investing.

• The confidence to encourage and absorb dissent yet to know when to act. Almost all organized human endeavors have at their core a paradigm of broadly agreed beliefs, stylized facts, and patterns of thought that impose a uniformity of views.

Ideas that challenge the paradigm tend to be ignored, not absorbed: Markowitz’s thesis was not rated as genuine economics, while Akerlof’s ground-breaking paper on the pricing impact of information asymmetry (Akerlof 1970) was twice rejected. Both eventually won Nobel prizes.

• The wisdom to know when to cooperate, a rare trait in a culture that has elevated competition to quasi-religious status. Much (though not all) investment information is “non-rival,” so that its value increases through sharing, as evident in open-source ventures. Yet by temperament, training, and incentives, many have an antipathy to sharing. In a study that engaged students in a game in which participants do better by cooperating, 60% of general students cooperated while only 40% of economics students did (Frank et al. 1999).

• The self-control to value patience, and so resist the short-term imperative and its eternal concomitant, being busy.

• A willingness to question and be curious, traits lacking in many boards that oversee other people’s money. After spending time embedded in American pension funds, the anthropologists O’Barr and Conley (1992) reported “a surprising lack of interest in questioning and surprisingly little interest in considering alternatives.”

Gray goes on to write that we can put people into two categories: hedgehogs and foxes. And while the investment world has plenty of the former, it is short on the latter. From the article:

Isaiah Berlin (1953) bequeathed us a crude but useful typology of people: hedgehogs view the world through the lens of a single defining, and usually substantial, idea; foxes view it through multiple lenses. Both types are needed in investing, but we are over-populated with hedgehogs who better fit compartmentalized corporate structures and are more fecund. We need more foxes, people with broader perspectives willing to trespass—a notion coined by Albert Hirschman (1981)—into foreign fields.


Cultural change is needed to recognize, support, and reward foxes, who tend to be spurned by tribal hedgehogs as soft-headed dilettantes. To Charlie Munger (1994), having different mental models is the most important thing in investing, because they expose new opportunities and drive a dialectic of risk. Investment organizations should seek more people with “contrary imaginations,” as the psychologist Liam Hudson (1967) phrases it: people with exceptional intelligence in alternative but meaningful ways; people with intelligence about the humanities, especially history and psychology, the disciplines that underlie and drive markets; people with emotional intelligence to direct and manage others; and people with organizational intelligence to get things done.

Gray provides much more analysis in the full article, which can be read here.


Photo by Nick Wheeler via Flickr CC License