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Executive and professional education


Childhood trauma from a parent’s death or divorce causes mutual fund managers to be more risk averse later in life, finds a new study co-authored by Professor Raghu Rau of Cambridge Judge Business School.

Scissors dividing a paper garland family.

Raghavendra Rau
Professor Raghavendra Rau

professionals may focus laser-like on the latest numbers, but traumatic
childhood events can in fact affect their investment decisions decades later,
finds a new study co-authored at Cambridge Judge Business School.

The study – “Till death (or divorce) do us part” – focuses on mutual fund managers who experienced family disruption during their childhood years. It concludes that such childhood trauma causes fund managers to be more risk averse and to invest less in “lottery-like” stocks, make smaller tracking errors (the gap between a fund’s return and a tracked benchmark index), and bet less during recessions on “factors” (such as momentum as measured by past performance, and size as measured by market capitalisation).

Yet when the
study looked at performance, it found that such fund managers do not perform
better or worse than peers who did not experience such childhood events. This suggests
that managers so affected during childhood tend to avoid both upside and downside risks, as they “forgo upside
potential in order to avoid downside potential.”

This also
shows up in their behaviour after they have been appointed to manage funds.
Affected fund managers are more likely to avoid holding stocks of firms in
their portfolios that take risks. For example, they are significantly more
likely to sell their positions (or even terminate their holdings) in stocks of
firms that experience CEO turnover or announce a merger, particularly if the
target in the announced acquisition is a foreign or non-public firm. Affected
managers are also more likely to sell their stock if the VIX index (market volatility
index, sometimes called the “fear” index) goes up.

The study
focuses on mutual fund managers for US-based funds between 1980 and 2017, using
a final sample of more than 500 fund managers and 5,241 fund years – based on information
including federal and state records, obituaries, college yearbooks and city

“It is
commonly believed that fund managers with their extensive experience and
training are unlikely to be affected by behavioural factors, but our evidence
suggests otherwise,” said study co-author Raghavendra Rau, Sir Evelyn de Rothschild Professor of Finance at Cambridge Judge
Business School. “And the phenomenon we examine, family disruption, is
becoming increasingly prevalent across societies around the world. About 40 per
cent of children in the US experience a parent’s divorce before they reach
adulthood, and more than half of all divorces involve children under age 18.”

The study
finds that fund managers affected by a parent’s death or divorce before the age
of 20 reduce total fund risk by about 17 per cent (relative to a sample mean)
after they take office.

This is most
pronounced during their most formative years (age 5-15) compared to
less-formative years (0-4 or 16-19), among fund managers whose widowed parents
did not quickly acquire new partners, and in situations where there was not
social support including membership religion-based networks. Age, geography and
economic backgrounds do not change the underlying results.

reduction in total risk results from managers taking less idiosyncratic,
systematic, and downside risk,” the study says. “The evidence suggests
that fund managers who experienced early-life family disruption differ
significantly in terms of several portfolio activities.”

Professor Rau
previously studied the affect of other types of early-life trauma – proximity
to earthquakes, floods and other natural disaster – on behaviour of CEOs much
later in life. Whereas that earlier CEO study was based on whether the person
lived in the area of the disaster (whether witnessed or not), the new fund
manager study is based on individual experience of having a parent die or
divorce during childhood.

effect on people’s brains of such childhood experiences has long been reflected
in medical literature, but we wanted to test it on how it affects finance
professionals later in life,” said Professor Rau. “While the study
focuses on mutual fund managers, we believe that the findings related to
risk-taking behaviour would also apply to other investment professionals.”

The study – entitled “Till death (or divorce) do us part: early-life family disruption and fund manager behaviour” – is co-authored by André Betzer of BUW-Schumpeter School of Business and Economics, Peter Limbach of University of Cologne, Raghavendra Rau of Cambridge Judge Business School, and Henrik Schürmann of BUW-Schumpeter School of Business and Economics.