A new report “from the coalface” of super fund investing has gone some way to quantifying the cost of shonky investment management, with members potentially losing out on hundreds of thousands of dollars.
Surging equity markets have driven the Future Fund’s return higher, but its prediction that inflation will be stickier than expected has been born out and it “remains conscious of the potential for significant deterioration”.
Psychology of indecision: super funds are culprits too
(Pictured: Annie Gurton)
The global accounting information firm CCH grew frustrated at clients’ reticence to adopt new and better systems, even when shown they would save money and improve efficiency. So, the firm commissioned an industrial psychologist to find out why. Her observations are applicable across most industries, including superannuation.
Annie Gurton, a psychological therapist now based in Sydney, says humans have many cognitive biases, such as ‘confirmation bias’, whereby we are inclined to see only things which support our views, and ‘bandwagon bias’, whereby we believe things because other people do. There is also ‘status-quo bias’.
Status-quo bias is particularly interesting because it also involves a paradox. Psychologists, like economists, love paradoxes. Gurton says: “The status-quo bias encourages us to stay in our comfort zone where we can avoid the anxiety or risk of the sting of regret. Paradoxically, however, we most regret those actions and risks we do not take [rather than the ones we do take]. Of the many regrets that people describe, regrets of inaction outnumber those of action by nearly two-to-one.”
Gurton has an MA in Psychotherapy, a BSC (Hons) in Psychology and a BS (Hons) in Humanities. She is a member of the British Psychological Society. She says “willful blindness” can be psychologically complex.
“People are afraid of change and will stick to the status quo and systems that have worked in the past until they are forced to evaluate, by which time it’s too late to make a controlled well-managed upgrade,” she says. This is about an aversion to conflict, compelling people to turn a blind eye to danger.
“Because decision outcomes are rarely certain, neither are the benefits they might bring,” she says. “Errors can be costly so sticking with what has worked in the past is frequently regarded as a safe option provided previous decisions are ‘good enough’.”
You don’t have to be a psychologist to understand that all that makes sense. Why then, do certain organisations, the most famous being Apple Inc, seemingly look for, and embrace, change, and the rest of the pack don’t?
Gurton says that the “Steve Jobs factor” was important at Apple and that companies generally need some sort of break-through catalyst to embark on a big change such as a new operating system. An empowered CEO – or dare we say an autocratic one like the late Jobs – can cause such a change.
But most organisations, such as big super funds, do not have one entrepreneurial person in charge. The trustee boards of funds, for instance, will usually have more power than the board of a listed company, say, because there are no ‘shareholders’ in a super fund, just ‘members’ with no voting rights. There are other stakeholders, such as unions and industry associations, but they have power rather than rights. This makes it difficult for an individual to wield autocratic authority.
For super funds and other financial services organisations, many of which have suffered sharp staff cut-backs since the 2008 crisis, there is the added burden of insufficient time to properly study a proposed big change. People are working in the business rather than on the business.
For super funds, risk is a paramount concern and the psychological forces at play compound any issues involving change. Gurton says: “The status quo has a gravitational pull which feels easier and less risky. It requires less emotional and mental energy to leave well alone… Change feels like ‘redirecting the riverbed’ which is risky and effortful.”
A CCH presentation incorporating Gurton’s work was held in Sydney last week. The accounting information firm is trying to wean its clients off the use of spreadsheets and to incorporate more sophisticated and specialized systems in their processes.
Tony Katsigarakis, CCH commercial director, said financial managers might be guilty of willful blindness in the face of a relentless onslaught of ever-increasing compliance and reporting requirements.
– Greg Bright
