Economists at the University of Arizona have found significant differences in the investments of US hedge funds. Those that donate to left-wing political causes are more likely to own smaller and younger stocks than funds that support right-wing causes. Left-wing funds are also more likely to own stocks that are more volatile and that don't pay dividends.
This seems odd: why should a manager's political beliefs affect his opinions on apolitical matters such as the merits of smaller stocks?
They don't. Instead, what this shows is that our attitudes to both politics and investing are coloured by psychological predispositions.
Our political opinions aren't based solely on a dispassionate assessment of the parties' values and policies. They are also the result of our psychological dispositions, as New York University's John Jost has shown. For example, pre-school children who are energetic and impulsive are more likely to be left-wing when they are adults while their more reserved contemporaries are more likely to be right-wing. And other researchers have found that there's a genetic basis for our political differences.
Just as psychological differences generate different political views, so they produce different investment opinions. People who are conservative in their politics tend also to be conservative in their investments, preferring older value stocks to new growth ones. (I stress 'tend' here: there are of course exceptions to this.)
What's true of investors is also true of company bosses. Economists at Florida State University have found that chief executives who are more politically conservative tend also to be more conservative in their business strategies; they have less debt, spend less on capital and research and development, and tend to make less risky investments.
There's more evidence that our investment choices are shaped by our psychology rather than a cold-blooded assessment of risk and return. Stefan Nagel and Ulrike Malmendier, two California-based economists, have shown that people who experience recessions and bear markets in their formative years are less likely to own shares even decades later, because these experiences shape their attitude to risk. And research into the investments of identical and non-identical twins has found that a quarter of the differences in portfolio risk are due to genetic differences, with an even bigger proportion of the tendency towards investment errors (such as overtrading or the disposition effect) having such a basis.
Investment styles "are partially ingrained from birth" says Henrik Cronqvist of the China Europe International Business School. His research has found that people are more likely to be value investors if they experienced recessions when they entered the labour market or if they come from a poor family - as Ben Graham, often called the father of value investing, did.
In one sense, these psychological influences upon stock selection aren't a wholly bad thing. It's impossible to research hundreds of shares, so it might be a good thing to limit our focus somehow.
However, let's not kid ourselves that our investment choices are based simply upon rational, cold-blooded calculation. They are not.
