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State of Anxiety – Joachim Klement

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Our attitude towards risk is largely influenced by external factors such as gender, age and personal experience. But according to Dietmar Fehr and Yannick Reichlin also who we hang out with.

Almost 20 years ago, the French philosopher and provocateur Alain de Botton published his analysis of how capitalism, income inequality, democracy and the media all conspire to create status anxiety. His argument was that in our modern society we all compare ourselves to others. This in turn leads to over-consumerism, or as the saying goes: “to spend money, we don’t have to buy things we don’t need to impress people we don’t like.”

Of course, de Botton did not single out a new human trait that appeared in the 21st century. He was smart enough to give the emperor enough new clothes to write a bestseller. We are inherently competitive, and we are always comparing our situation to that of our friends, family, and other people in society.

However, what has changed in the 21st century is that we now have media that allows us to compare our situation with that of millions of people around the world. Back in the 19th and 20th centuries, we didn’t have FOMO, or at least not to the degree that we have it today.

The same goes for investors and fund managers. Thanks to modern databases and the work of investment consultants, each fund manager today is compared with many funds around the world with similar characteristics. So what do these fund managers do when they start feeling status anxiety because their fund is underperforming their peer groups?

Well, we don’t know for sure, but we do know that hedge fund managers who are underperforming and therefore at risk of losing their performance fees tend to increase the risk in their funds or close them and open a new one.

Meanwhile, private investors are simply increasing their risk to catch up with people higher up the flagpole than they are. The Fehr and Reichlin study mentioned above put people in a position where they were led to believe that their wealth belonged to the bottom 10-20% of their peer group. They were then asked to participate in risky investment decisions with varying levels of risk. Just like in the financial markets, investment options have been designed to offer higher expected returns at a higher level of risk.

And guess what, people who were led to believe that they were among the poorest in their peer group took, on average, 18% more risk in their investment decisions than people who were led to believe that their wealth above average. Status anxiety caused increased risk to catch up with peers.

But there was one group of people who increased their risk even more, by a whopping 34%. People who believed that luck was not in their own hands, but decided by fate, omens or other external factors, were even more willing to take risks than people who believed that they were responsible for the outcome of their actions.

So, if you own money and want to entrust it to a professional fund manager, the lesson to heed is not to entrust it to superstitious fund managers. They are more inclined to take more risks because they already have ready excuses when things don’t go their way. It was never their fault, always some external reason.

And if you’re a fund manager yourself, be aware that status anxiety can lead you astray and tempt you to take risks you wouldn’t take if you weren’t comparing your situation to other funds.

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