Navigating Groupthink in Fund Management: Challenges & Strategies

Fund managers are often pulled in multiple directions at once because they are responsible to investors with a wide array of priorities. Even though fund managers attempt to set a distinct style for a fund in order to attract like-minded individuals, there will always be some conflict over how individuals want their money handled. Further, a fund manager must balance information from market advisers and market performance to determine a strategy. If a manager isn't careful, all of this advice and ultimately lead to a swaying from initial intention due to groupthink mentality.

Groupthink Mentality

Groupthink is a term coined by social psychologist Irving Janis based on observation of how humans are swayed by the opinions of others. When a person has an intention in mind, he or she must work very hard to stick to the intention amidst the noise of other opinions, advice and statistics that may request a different course of action. Sometimes this concept is described in the common phrase, "too many cooks in the kitchen." The idea is that one person is the best judge of what is needed to create a recipe for food or, in a fund manager's case, profit. The person has a clear understanding of the initial intention, factors and moral judgments that lead to the recipe. If someone steps in half way through to change the recipe, it is like questioning why a baker is putting so much sugar in a recipe without knowing he or she is trying to make cake.

Mutual Fund Style Drift

When a manager gives in to groupthink, he or she may be trying to answer the demands of many all at once. Investors want larger profits, firms want to secure more sales, the market is dictating other behaviors, and the manager is caught in the middle. By trying to correct in one way or another, the manager can drift from the original recipe for success he or she determined was the correct course of action. This is commonly called style drift with mutual funds. It means the fund has no clear method for approaching investments but instead follows market trends or demands without long-term planning. Not all style drift is bad, but sometimes it can be a sign of groupthink mentality affecting a mutual fund manager.

Avoiding Groupthink Mentality

To avoid being subject to groupthink, a mutual fund manager needs to narrow the advice and opinions he or she will use in order to determine a course of action. For example, instead of listening to all stock bloggers and financial authors, a fund manager can select a few that have similar intentions and goals as those they would like to emulate in the fund. When investors become angered with a decision, a manager can back up the choice instead of conceding to demands for change. Ultimately, the manager needs to have a clear recipe for success with the fund and stick to it even when things are not immediately successful. While small adjustments may be necessary, swaying too far from the recipe due to the opinions of others can compromise the underlying judgments that initially lead to sound decisions.