Thursday, December 22, 2016

Sports Cars and Money Management

Via Tyler Cowen, a wonderful piece of economic research:
We find that hedge fund managers who own powerful sports cars take on more investment risk. Conversely, managers who own practical but unexciting cars take on less investment risk. The incremental risk taking by performance car buyers does not translate to higher returns. Consequently, they deliver lower Sharpe ratios than do car buyers who eschew performance. In addition, performance car owners are more likely to terminate their funds, engage in fraudulent behavior, load up on non-index stocks, exhibit lower R-squareds with respect to systematic factors, and succumb to overconfidence. We consider several alternative explanations and conclude that manager revealed preference in the automobile market captures the personality trait of sensation seeking, which in turn drives manager behavior in the investment arena.

3 comments:

G. Verloren said...

It's always nice to see real numbers backing up something that sounds like common sense.

Now if only we could translate that into promoting more sensible behaviors in our economy / politics / society at large...

John said...

Yes, the banking reform we really need is to ban testosterone-charged gamblers from the field altogether. Not sure how to write legislation to achieve that, though.

G. Verloren said...

How about writing laws that require investment bankers to act as fiduciaries? How about reforming our investment banking registration and licensing systems? How about ramping up inspections and audits, applying more stringent regulations, and imposing more severe penalties and consequences for wrongdoing?

The problem isn't writing the legislation - the problem is getting it enacted. Wall Street has an absurd degree of influence over our legislators, fielding an army of lawyers and lobbyists to protect their interests through influencing the law in their favor.