Monday, December 29, 2014

Is Investing Groupthink Caused By The "Urban Versus Rural" Culture Divide?

This is old, but I thought this essay "How Diversity Punishes Asians, Poor Whites, And Lots Of Others" was interesting.

Besides the bias against lower-class whites, the private colleges in the Espenshade/Radford study seem to display what might be called an urban/Blue State bias against rural and Red State occupations and values. This is most clearly shown in a little remarked statistic in the study's treatment of the admissions advantage of participation in various high school extra-curricular activities. In the competitive private schools surveyed participation in many types of extra-curricular activities -- including community service activities, performing arts activities, and "cultural diversity" activities -- conferred a substantial improvement in an applicant's chances of admission. The admissions advantage was usually greatest for those who held leadership positions or who received awards or honors associated with their activities. No surprise here -- every student applying to competitive colleges knows about the importance of extracurriculars.

But what Espenshade and Radford found in regard to what they call "career-oriented activities" was truly shocking even to this hardened veteran of the campus ideological and cultural wars. Participation in such Red State activities as high school ROTC, 4-H clubs, or the Future Farmers of America was found to reduce very substantially a student's chances of gaining admission to the competitive private colleges in the NSCE database on an all-other-things-considered basis. The admissions disadvantage was greatest for those in leadership positions in these activities or those winning honors and awards. "Being an officer or winning awards" for such career-oriented activities as junior ROTC, 4-H, or Future Farmers of America, say Espenshade and Radford, "has a significantly negative association with admission outcomes at highly selective institutions." Excelling in these activities "is associated with 60 or 65 percent lower odds of admission."

In an attempt to find out what kind of diversity exists -- or doesn't exist -- on the Princeton University campus, I once asked students in a ten-member discussion group to raise their hands if they knew one or more Princeton undergraduates who had served a year or more on active military duty (in the late 1940s or early 1950s, of course, undergraduates at Princeton would have encountered legions of such people coming back from WWII and the Korean War). I made it plain that I wasn't asking if the students had a close friend or roommate who was a veteran, just a single person with military experience that they had at sometime encountered during their Princeton undergraduate careers. Only one student -- a female -- raised her hand: this student once met someone who had served in the Israeli military.[...]

Military veterans and aspiring military officers, like poor whites and future American farmers, are clearly not what most competitive private colleges have in mind when they speak of the need for “diversity”. If nothing else the new Espenshade/Radford study helps to document what knowledgeable observers have long known: “diversity” at competitive colleges today involves a politically engineered stew of different groups. drawn from the ingredients selected by reigning campus ideology. Since that ideology is mainly dictated by the Left, it is no surprise that the diversity achieved is what the larger American landscape looks like when it is viewed through a leftist lens.
The Espenshade/Radford study is available here.

This has investing implications because institutional investment managers are drawn overwhelmingly from selective colleges. They are screened for particular ideologies and personality types, and they are by definition very unfamiliar with vast portions of the country and its population. (Vail and Aspen are not rural.)

My guess is that this contributes to the groupthink that we see in investing, and in particular to the inability to imagine negative outcomes. Has anyone at Princeton (or an asset manager with over $10 billion AUM) ever come from a town where the mine or paper mill closed?

But also, in high school and college these type A personalities learn an abiding faith in the power of hard work (busywork). I've written that
"the VIC/value investors don't say 'it's too hard, there's nothing good, I'm going to cash'. Instead, they say, 'look what I found digging by DEEP into the trash pile', with the implication that they are geniuses for knowing just where to dig in the trash pile."
There's never a time in these people's formative experiences that the right answer is to just sit and do nothing. So, they don't know how to.


Steve said...

I think you are overly extrapolating from university ideologies to investment manager behavior. In particular, most investment managers are 'economic conservatives' who have specifically learned to disavow the economic ideologies they were taught in school. In general, smart people are adaptive and able to discard ideological indoctrination that doesn't suit them.

But I do think you have a good second point about busybodies... that's a behavior that does suit most people trying to climb the ladder and it isn't unique to investment managers.

That's the reason that DC policy wonks always want to fix some injustice, software developers always want to add new features (or bugs), and investment managers always want to trade or seek out some exotic value.

I think there's a case to be made for moving somewhere like Salt Lake City, or Tampa, or Omaha, where there's enough geographic distance from the busybodies to allow for perspective, and enough low-cost recreation to occupy one's time.

High Plateau Drifter said...


I don't think that CP was suggesting that ideologies influence investment professionals, but rather that social isolation from most of the working class in blue states and most people in the red states blinds them to economic reality.

In every city that investment managers visit, the restaurants they frequent are full of patrons and booming. The economy looks and feels great and they have no reason to doubt falsified economic statistics from fedgov.

It is the problem that Murray and Herrenstein alluded to in "The Bell Curve" in their cursory and very cautious 27 page chapter on the "dangers of social isolation by IQ," a concept so alien to those most socially isolated as to render any meaningful description of the problem fatal to book sales.

The broad point is that the managerial class is effectively restricted to their many Potemkin villages throughout America and Europe that herding investment behavior is almost guaranteed as is the inability to perceive what the economy is like for the bottom 90% of the population and the inability to see that, because of economic and social isolation, government statistics can be tailored to the expectations and perceptions of an economic elite with no fear of offending the masses.

Anonymous said...

Chances are you've seen this, but Phil Greenspun mentioned something that ties into your post about groupthink:

Three Harvard researchers in “The Cost of Friendship” ” find that venture capitalists who share the same ethnic, educational, or career background are more likely to syndicate with each other. This homophily reduces the probability of investment success, and the detrimental effect is most prominent for early-stage investments..”

CP said...

"There's never a time in these people's formative experiences that the right answer is to just sit and do nothing. So, they don't know how to."