How Investment Committees Can Avoid Groupthink

It’s easy to assume that if everyone did their part individually, a team would function smoothly and efficiently, but group dynamics, synergy and demographics all can either contribute or detract from an investment committee’s effectiveness.

A new white paper the firm Arnerich Massena, “Investment Committees: More than the sum of their parts,” discusses how an investment committee that falls prey to groupthink can impact its ability to function as a team and, ultimately, the performance of a plan’s investment portfolio. To avoid this dilemma, the firm outlines several strategies that committees can use to help strengthen their decisionmaking and group processes to improve investment outcomes.

“In our experience, we’ve seen some committees generate better outcomes than others,” notes Tony Arnerich, the firm’s CEO and a contributor to the paper. “We believe there are group dynamics at work that can systematically rob a committee of its ability to make consistently strong decisions.”

Irrational Behaviors

Similar to how behavioral economics has identified certain irrational behaviors, or heuristics, that individuals succumb to when making decisions, groups are also subject to irrational behaviors, which can be amplified even further in group contexts, the paper explains.

While groups function best when they make full use of the complete collective knowledge available to the members, the paper observes that this often is not the case. “Groups have a tendency to focus exclusively on shared information that is already available to all the members, rather than soliciting the unique information that only one or a few group members may be able to bring to the table,” it states. 

As a result, this lack of information sharing is compounded by the availability bias, which suggests that people tend to make decisions based on whatever information is at hand, notwithstanding whether it’s the most applicable or relevant, the authors emphasize. 

“There’s a common wisdom that decisions made by groups are better than individual decisions, but this is only the case when group members have the skills and training to make effective use of their collective knowledge and experience,” adds Chris Van Dyke, a Principal and Senior Investment Consultant with the firm. 

Key Attributes

In addition to building the right team and having a strong structure, the firm identifies several qualities that epitomize successful investment committees and contribute to a committee’s potential to improve the long-term performance of the portfolio. These include having the ability to look forward, an openness to new ideas and information, and self-awareness. 

“Overconfidence and confirmation bias can lead committees to be more comfortable embracing an investment strategy that has generated substantial returns in the past, rather than seeing opportunities in advance, particularly when they may not currently be in favor,” the authors state. Investment committees that can look forward and recognize the hallmarks of future opportunities will be able to take advantage of those opportunities, they further emphasize.   

Techniques the firm suggests can help a committee avoid groupthink and counteract its effects include:

• Committee chairs should refrain from expressing an opinion when an issue is initially approached by the group. 
• Groups should understand the benefits of healthy conflict and become comfortable with it. 
• Conflict and disagreement should focus on ideas and never turn into personal criticisms or insults.
• Consider including opposing opinions in meetings by inviting outside experts or even appointing a so-called devil’s advocate.
• Form subcommittees to discuss important issues, so each group can deliberate under a different leader.

Traditional vs. Discretionary Advisory Services

Increasingly, organizations are choosing a partial or fully discretionary approach to investment advisory services, Arnerich Massena’s white paper observes. In asking when it would be appropriate to choose a discretionary model over traditional advisory services, the firm suggests it depends on the committee and its availability, expertise and preferences. 

There are some situations in which the firm recommends that a committee consider whether it might benefit from a discretionary approach. These include:

• when there is consistently high turnover of committee members, making continuity difficult;
• if there is a large number of members, making coordination and timely decisionmaking challenging;
• if there is little investment sophistication among all committee members;
• if the committee feels more comfortable turning over some of the fiduciary responsibility of investment decisions; and 
• if the committee wants to focus its efforts on big-picture issues and oversight rather than day-to-day investment decisions.