The Business of Decision Making

by Emily Sohn

Gary Kohler's undergraduate psychology degree has provided a unique advantage in his financial career

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Gary Kohler never wanted to be a psychologist, and he isn't one today. But he studied psychology at the University, and the experience has given him a world of unexpected insights into his life as both a father and a hedge fund manager.

"I knew it was important at the time," says Kohler, who graduated with a psychology degree in 1978. "I didn't know how important it would be."

When Kohler started college, he thought he wanted to be a lawyer. But the freshman was advised to study what interested him, even if he intended to be pre-law. Since he had always enjoyed reading popular psychology magazines, he started signing up for psychology classes, thinking he knew what he was getting himself into. "My view of psychology was that it was touchy-feely, all about feelings and a smattering of Freudian stuff," he says.

But after taking courses like Sensation and Perception and Cognition, he was surprised to discover that psychology is a real science based on methodical research and hard data. "It's a systematic study of what people do, why they do it, and how they do it," he says. "That appealed to me."

Over time, Kohler's interest in law evolved into an interest in business, but he continued to pursue his fascination with psychology and his interests soon started to intersect. A class on decision making, for example, inspired him to analyze the choices consumers make about the products they buy, among other questions.

"A store is really just a great big rat maze," he says. "Which aisles people go up and down is a function of a lot of things -- how people learn, what people perceive," and other standard psychological concepts. These and related ideas would eventually form the crux of an emerging field called behavioral economics. Early on, Kohler realized that the study of human behavior could have a profound impact on the study of economics. Whereas economic theory predicts what people ought to do in financial situations, he says, psychological research can show what people actually do in those situations.

Kohler continued to explore consumer behavior at Cornell University in Ithaca, New York, where he earned an M.B.A. in 1981. Now he works as a portfolio manager for the Minneapolis-based hedge fund management company Whitebox Advisors, where he finds that his psychology background helps him help his clients make better financial decisions.

For example, psychologists talk about primacy and recency effects: when people are given a long list of nonsense syllables, they remember the first and last syllables in the list but forget the ones in the middle. The same is true of investments, Kohler says. Overwhelmed by too much information, people often pick stocks that are mentioned first or last on lists that have been presented to them. They also tend to fall prey to what scientists call an availability bias: investing in major companies with name recognition over obscure companies, even if the obscure stocks are financially smarter choices.

"A lot of what I do is look at biases in human behavior and try to get outside those biases," Kohler says. "I don't think of the stock market as a market of stocks," he adds. "I think of it as a market of human behavior."

His psychology-based strategies seem to be working. At Whitebox, Kohler runs a $700 million hedge fund that was up 40 percent in 2007. The fund was named the "Absolute Return 2007 Small Cap Hedge Fund of the Year."

Psychology has influenced more than just Kohler's work life; it has also become a family affair. His younger daughter, Anna, is a sophomore and psychology major at the University of Minnesota. His older daughter, Sarah, is a psychology major at New York University and is looking into graduate programs, including Minnesota's. "When they went off to college, I said, 'Be sure to take psychology. You're going to find it really interesting,' " Kohler says. "They don't always listen to everything I tell them." But in this case, the message came through loud and clear.

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This page contains a single entry by cla published on November 25, 2008 3:25 PM.

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