The Emotion of Money: The Posited Relationship of Emotional Intelligence to Long-Term Investment Performance

Abstract

Is investment performance improved if one’s emotions are controlled in comparison to others who are panicking and over reacting to volatile swings in the stock market? Logic suggests this could be the case given that investors who can stay balanced and trade against this cycle of emotion typically are investment performance leaders. This thesis investigates to see if there is a relationship between emotional intelligence (EI) and investment behavior. Emotional Intelligence includes characteristics such as emotional awareness and emotional management. A previously published Vanguard Investments study about individual investors found that those who tested higher for emotional intelligence made investment decisions that correlated with better investment outcomes. This thesis advances that concept by investigating professional mutual fund portfolio managers. Higher levels of emotional intelligence should be even more vital for portfolio managers who depend on emotional management for career survival. The study hypothesized that those who have higher emotional intelligence would have better investment performance than their peers. The study’s portfolio managers were recruited by email and completed a survey, which ascertained emotional intelligence attributes based on their responses. Portfolio managers who tested higher for emotional intelligence exhibited investment performance that was modestly superior to their peers. A control group of individuals were then asked the same types of questions. Their responses reflected lower mean EI scores and less control over their emotions and their financial composure. The results point to a link between emotional intelligence and investment performance. More specifically, the portfolio managers with the highest mean EI test score managed mutual funds that reported performance in the highest investment performance quartile. This relationship was modest but meaningful and points to an important input in the investment decision process.