This article was inspired by a book I recently read, “Quiet: The Power of Introverts in a World That Can't Stop Talking,” authored by Susan Cain. Although I was never in doubt that introverts make better value investors, this book draws on research in psychology and neuroscience to further enforce my belief.
Extroverts Are Reward-Sensitive and Take More Outsized Risks
A reward-sensitive person is highly motivated to seek rewards; while value investing is more about risk identification and avoidance (or at least accepting the ones that come with the right risk-reward equation) than seeking rewards. Reward-sensitive extroverts tend to get carried away and make huge bets even when the odds are hardly in their favor. In contrast, according to research done by Richard Depue, a neurobiologist at Cornell University, found out that extroverts had a stronger response when they were given an amphetamine that activates the dopamine system compared with introverts. In short, introverts get less “kick” from rewards and are less likely to suffer from the winner’s curse, overpaying for stocks.
Introverts Are Better at Delaying Gratification and Have a Long-Term Investment Orientation
The “I want it now” mentality displayed by most extroverts is at loggerheads with the long-term orientation and immense patience required of value investors. Instant gratification also manifests itself in the selling of stocks, a key component of investment returns. When faced with a choice between a 20% gain in days to months and a multi-bagger in years, extroverts have a greater probability of succumbing to the temptations of the former.
Introverts Are Not Smarter — They Are More Persistent
Extroverts perform equally well as introverts on IQ tests and are more adept at multi-tasking. However, introverts have the ability to direct more of their cognitive capacity to the tasks at hand, and that makes a world of difference. Extroverts tend to take short cuts and value speed over accuracy — this leads to use simple rules of thumb to accept or reject stocks as investment candidates. Comparatively, introverts are very focused on the task at hand and show greater persistence, especially with regards to more difficult tasks. One classic example is that of the misunderstood contrarian stock beset by negative news: Introverts will have a higher chance of staying with the stock till the dark clouds are gone and the stock price returned to its rightful intrinsic value.
I strongly recommend investors read this book. Although I worded the title of my article in such a manner, it is not my intention to put down extroverts as a class of value investors. On the contrary, both introverts and extroverts have much to learn from each other. The behavioral edge is still the most underestimated and under-researched aspect of value investing, compared with the analytical and informational aspects. Interestingly, my observation is that traders have devoted a greater amount of effort and time to psychology to improve their returns, compared with value investors.
About the author:
Mark LinWorking hard to be a better investor