Culture reflects the mindset of a firm. The mindset is the set of attitudes that the firm holds. Firm culture, then, is the firm’s collective set of attitudes.
So what sorts of mindsets correlate with investment success and better decisions?
The overarching answer — psychological safety — may be a bit surprising: The investment profession tends to favor the “hard” skills of discipline, structure, and process over “softer” counterparts like self-awareness, empathy, and trust. So the centrality of psychological safety to effective mindsets may raise a few eyebrows, especially among the quantitative practitioners who work to take the emotion out of investing.
But what is psychological safety exactly? Amy C. Edmondson, a leading researcher in this area, defines it “as a climate in which people are comfortable expressing and being themselves.”
Our research on top investment teams — quant teams, among them — found that they all reflected mindsets associated with psychological safety. To a statistically significant degree, the best teams rated the following factors as keys to success:
- Continuous improvement
- Development of team members
- Commitment to one another
- Enjoyment in working together
- Capacity for good debate
None of these factors could truly flourish in a fearful, vindictive environment. To nurture these mindsets, psychological safety is a necessity. The best thinking requires security. As Edmondson explains, when they feel they are in a safe environment:
So how do the best investment teams create psychological safety? How do they establish cultures in which people are comfortable expressing themselves? We’ve found that the successful processes can be distilled into a single word — “mutualism”:
Mutual dependence means we’re in this together. Of the factors above, two speak directly to this: “Commitment to one another” and “Enjoyment in working together.”
A research participant from one of the firms we worked with told us:
“Our process and our success is built upon the team and its commitment to each other. Without the commitment, I don’t think we’d have the culture of trust which allows us to be creative, make mistakes, and still show up deeply excited to be there the next day.”
This sentiment was common to all the top teams. Indeed, most teams — whether they’re strong, weak, or somewhere in the middle — tend to share a sense of mutual purpose, a powerful drive to outperform and create value. But this aligned interest, while essential, is not enough to elevate an investment team to the top tier.
The best-performing teams, we found, practice three additional “mutuals.”
1. Mutual Understanding: Curiosity
Mutual understanding requires an open and curious mindset. Team members want to hear and comprehend other viewpoints: They welcome contrasting ideas and are not threatened by opposing perspectives. They are committed to learning, not to being right. They adopt behaviors that encourage curiosity and avoid those that discourage it:
Great investment team members are more interested in getting the facts on the table and searching for the truth than they are in winning the argument or looking good. The best among them learn to recognize when they have become defensive so they can shift back to that curious mindset.
2. Mutual Respect: Candor
If curiosity is the ideal mindset for receiving information and learning from it, then candor is the mindset through which this information and our analysis of it are best expressed and our feedback is provided to others. Mutual respect means learning to speak without putting others on the defensive or otherwise demeaning or attacking them. Effectively candid team members apply a variation of the Golden Rule: “Am I addressing this person in a way that I would like to be addressed?”
Empathy is important. Those equipped with this mindset can grasp when other people are reacting defensively to their comments and can adjust. We refer to this skill as “forthright diplomacy.” That means we don’t sugarcoat our message but deliver it in a way that makes our point without negating or disrespecting that of others. We express our views in thoughtful rather than cavalier or confrontational language.
A key element of skillful candor is owning our perspective and recognizing what it is: simply a viewpoint. After all, investments are a bet on the future. None of us know if our perspective will turn out to be correct. So we shouldn’t express it as if we believe it will be. The unskillful approach is to dismiss or attack the other person to demonstrate that our viewpoint is the better one. The goal of candor is to maintain respect for all the perspectives in the room while honestly expressing our own. If we speak in a way that shuts others down or puts them on the defensive, then we’ve failed the candor test. We should ask ourselves, “Am I trying to win the argument or be effective in my communication?”
The ego wants to win, but the good team member wants to encourage open and honest communication. Success means that we have encouraged others to remain curious. Failure is when the discussion turns defensive and unproductive.
3. Mutual Valuing: Appreciation
Appreciation is the last critical component of psychological safety. Perhaps the most underused of the three “mutual” factors, appreciation means we seek out the value in other people and practice “success spotting” instead of “fault finding.” In the investment world, there is an abundance of criticism, while appreciation tends to be in much shorter supply. We asked investment leaders why they think this is. Their explanations were almost comical:
“We pay them a lot of money. That’s how we show appreciation.”
“If we appreciate them, they’ll ask for even more money.”
“If we appreciate them, they’ll stop working so hard.”
“If I don’t say anything, it means they are doing fine.”
Do these answers encourage engagement or safety? Definitely not. And there are consequences. Talent will leave for a better culture even if it means less money. People will go where they feel their contributions are valued and recognized. And money isn’t the only form of recognition. One portfolio manager we know took a 50% pay cut to join a firm he described as “very positive and appreciative of his value.”
Finance professionals can be a skeptical crowd and sometimes equate appreciation with insincere flattery. They don’t want to patronize people. And while that’s understandable, appreciation doesn’t mean blowing smoke or buttering people up. And sometimes just a little can go a long way.
The ideal appreciation-to-criticism ratio is five to one, according to research from John M. Gottman, among others. That’s five positive exchanges — even just the simple act of respectful listening — for each critical one. Too often, investment professionals tell us they receive almost no positive recognition. All criticism and no appreciation creates a fearful environment. When we’re in such a space, we wonder if any of our work is valued, if we’re doing anything right. And we become more risk averse and myopic: If our normal work generates negative feedback, why take a chance and stretch beyond our already constricted comfort zones?
Often we contribute to the problem. Maybe we want a colleague to improve, so we feel the need to show them where they are “failing.” We want to do the right thing, but we do it in the wrong way. However noble the sentiment, the result can be demoralizing and damaging to safety.
Successful investment teams realize that creative and candid discussions are crucial to superior decision making. But they can only take place in a safe environment. And safety demands these three forms of mutualism in addition to mutual purpose.
How to Start?
First, assess the current level of safety on your team. Ask simple questions like, “On a scale of 1 to 10, how safe do you feel expressing your views?” Of course, if people feel a lack of safety, they may not answer honestly. So collect the data anonymously.
After you’ve assembled the data, share it and discuss it with the team and apply the concepts and tools presented above.
For more from Jim Ware, CFA, and Michael S. Falk, CFA, check out Let’s All Learn How to Fish . . . . to Sustain Long-Term Economic Growth from the CFA Institute Research Foundation and Money, Meaning and Mindsets.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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Continuing Education for CFA Institute Members
James Ware, CFA, is the founder of Focus Consulting Group, a firm dedicated to helping investment leaders leverage their talent. Ware is the author of “Investment Leadership: Building a Winning Culture for Long-Term Success,” and “High Performing Investment Teams,” both of which discuss those elements of leadership and teamwork that lead to sustainable success for investment firms. Ware has 20 years’ experience as a research analyst, portfolio manager, and director of buy-side investment operations. He has been a guest lecturer on the topic of investment firm management at the Kellogg Graduate School of Management, Northwestern University. Ware has a Masters in Business from the University of Chicago and a degree in philosophy from Williams College, where he graduated Phi Beta Kappa.
Michael Falk, CFA, CRC, is a partner at the Focus Consulting Group and specializes in helping investment/wealth management teams improve their investment decision making, and their firms with strategic planning and succession. Previously, he was a chief strategist at a global macro L.P., and a chief investment officer in charge of manager due diligence and asset allocation for a multi-billion-dollar advisory practice. He is a frequent speaker and presenter at industry events and often quoted in the press. Falk is part of the Approved Speaker List at CFA Institute. He has taught on behalf of the CFA Society of Chicago in its Investment Foundations Certificate program, been a contributing member in the Financial Management Association’s (FMA) practitioner demand driven academic research initiative (PDDARI) group, and adjunct faculty at DePaul University in its Certified Financial Planner (CFP) Certificate Program. Falk has authored or co-authored 2.33 books: the 2016 CFA Institute Research Foundation monograph Let’s All Learn How to Fish . . . to Sustain Long-Term Economic Growth, the 2019 follow-up Get to Work . . . on OUR Future, and, with Jim Ware, CFA, and Keith Robinson, the 2017 Money, Meaning, and Mindsets.