Our lives are driven by a fact that most of us can’t name and don’t understand. It defines who our friends and lovers are, which careers we choose, and whether we blush when we’re embarrassed. That fact is whether we’re an introvert or an extrovert.
So begins the blurb for Susan Cain’s first book, ’Quiet’, a look at "the power of introverts in a world that can’t stop talking." Released in 2012 it has already been translated into thirty languages and has topped both the Sunday Times and New York Times bestseller lists. It has received rave reviews from business people, educators, authors and social commentators. More pertinently, from our perspective, it explains why introversion and extroversion have important implications for the way we invest.
Take for example the story of Alan, as recounted by Cain and told in the first instance to Dr. Janice Dorn, a "financial psychiatrist" who has provided advice to over 600 traders. It was December of 2008, the year of the great stock market crash in the USA. Housing prices were plummeting, credit markets were frozen, and General Motors (GM) was on the brink of bankruptcy.
Alan had phoned Dorn for advice. He was a sixty-year-old Midwesterner who struck Dorn as a salt-of-the-earth type, hard-working and loyal. He had the cheerful and assertive manner of an extrovert, an attitude he managed to maintain even as his tale of disaster unfolded.
It appeared that Alan and his wife had worked all their lives, and had managed to save a million dollars towards their retirement. Four months before the stock market crash, and with no prior experience of financial markets, Alan convinced himself that he should buy $100,000 worth of GM shares. He had read that the US government might bail out the auto industry, and on the strength of this information had made his investment. He was confident that a financial gain was assured.
He had no sooner bought the shares when the media reported that the bailout might not happen after all. The market responded by selling off GM, and as a result, the share price fell. Undaunted, Alan imagined the thrill of making a killing. He was sure the share would rebound, so held on to his investment. But GM fell again, and again, and kept on dropping until Alan finally decided to opt out. He sold at a substantial loss.
It was not long before the media began to report that the rescue of the auto industry was in fact likely. Excited yet again at the prospect of easy riches, Alan bought another $100,000 worth of shares, this time at a considerably lower price. Alas, it was not long before the word on the street was that there would not be a bailout.
This time Alan stood firm, imagining how much he and his wife would enjoy spending their profits. He ’reasoned’ that the stock couldn’t go any lower, but it did and continued to drop until, at seven dollars a share, Alan sold yet again. And almost immediately bought again, when he heard that the bailout might go through after all!
By the time GM’s share price had fallen to two dollars, Alan had lost seven hundred thousand dollars, or 70% of the family nest egg. He was devastated and asked Dorn if she could help him to recoup his losses. She could not. "It’s gone," she told him. "You are never going to make that money back."
According to Dr. Dorn, Alan had made a number of fundamental mistakes. First of all, as an amateur investor, he should not have been trading in the first place. He had also risked far too much of his capital, as his total exposure should not have exceeded 5% of his net worth, or $50,000.
However, Alan’s biggest problem may have been beyond his control. Dorn believed that he was experiencing an excess of something that psychologists call reward sensitivity. A reward-seeking person is highly motivated to seek rewards; from a promotion to a lottery jackpot to an enjoyable evening out with friends. Reward sensitivity motivates us to pursue goals like sex and money, social status and influence. Reward-sensitive people are always trying to stretch themselves to grab life’s riches.
Sometimes we can be too sensitive to rewards. An excess of reward sensitivity can get people into all sorts of trouble. We can get so excited by the prospect of juicy prizes that we take outsized risks and ignore obvious warning signals. Alan was given plenty of warning signals, but was so excited by the prospect of a big win that he couldn’t see them. In fact, he fell into a classic pattern of reward sensitivity run wild; exactly when the signs were warning him to slow down, he speeded up. In doing so, he threw money he couldn’t afford to lose into a series of losing trades.
Introversion and extroversion
All fine and interesting you might say, but what has this got to do with introversion and extroversion? Doesn’t everyone get a little carried away at times? The answer is yes, except that some of us do so more than others. Dorn has observed that her extrovert clients are more likely to be highly reward-sensitive, while the introverts are more inclined to pay attention to warning signals.
Introverts are also more successful at regulating their feelings of desire or excitement. As Don says, "My introvert traders are much more able to say, ’OK Janice, I do feel these excited emotions coming up in me, but I understand that I can’t act on them.’ The introverts are much better at making a plan, staying with a plan, being very disciplined."
It appears that reward-sensitivity is not just an interesting feature of extroversion; some neuroscientists are beginning to believe that reward-sensitivity is what makes an extrovert an extrovert. In other words, extroverts are characterised by their tendency to seek rewards, from that big promotion to sexual conquests to big incomes. Extroverts have been found to have greater economic, political, and pleasure-seeking ambitions than introverts. Even their sociability is a function of reward-sensitivity; they socialise because human connection is inherently gratifying.
The brains of introverts seem to be wired differently; they have a smaller response to the prospect of rewards, and so go less out of their way to follow up on reward stimuli. Like anyone, they will be drawn from time to time to sex, parties, and status, but the kick they get is relatively small. As a result, they are not going to break a leg to get there.
It is interesting to examine how the differences in approach between introverts and extroverts translate into performance. In the first instance, it is important to note that there is no difference in intelligence between introverts and extroverts. IQ scores indicate that the two personality types are equally intelligent.
However, extroverts get better marks than introverts at primary school, but introverts outperform extroverts in high school and at university. Introverts also receive a disproportionate number of postgraduate degrees. They outperform extroverts on tests used to assess critical thinking, and have been shown to excel at what psychologists call ’insightful problem-solving.’
Extroverts are better, though, at tasks performed under time or social pressure, or involving multi-tasking. They also handle information overload better. Goal-directed tasks also come easier to extroverts, who naturally allocate most of their cognitive capacity to the goal at hand. Introverts, by contrast, use up cognitive capacity by monitoring and reflecting on how the task is going, rather than just forging ahead as the extroverts do.
But introverts seem to think more carefully than extroverts, who are more likely to take a quick-and-dirty approach to problem-solving. Extroverts tend to forego accuracy for speed, making an increasing number of mistakes as they go. They are also more likely to give up altogether when the problem seems too difficult or frustrating.
Although the case of Alan as discussed earlier is a rather extreme example, it is a reality that introverts are in general more successful investors than extroverts. Research shows that they take 28% less financial risk than extroverts, and are far more likely to do meticulous and painstaking research as well. It may not surprise you to learn that Warren Buffett is a confirmed introvert, often shutting himself away in his study and devoting hours of solitary contemplation to his investment interests.
How then can extroverts improve their investment performance? As Cain points out, if you’re a buzz-prone extrovert you’re lucky to enjoy plenty of invigorating emotions. You should make the most of them, by building things, inspiring others, thinking big. However, as extroverts you should also be aware of your weaknesses.
You should, therefore, train yourselves to spend energy on meaningful activities (such as investment research!) and not just on activities likely to deliver a quick buzz of money or status or excitement. As an extrovert you should also learn to pause and reflect when warning signs appear, instead of simply rushing onwards towards possible disaster. Try too to learn from your mistakes, and actually engage with people (from spouses to friends to business partners) who can help to rein you in and compensate for your blind spots.
Introverts make up between 33% and 50% of the population, yet are generally misunderstood, particularly by themselves. As one who leans more towards the introverted side of the spectrum, I found Susan Cain’s book a revelation. I now know, for instance, that it is not necessarily weird to want to stay in with a good book at times, rather than go out and party.
I would, therefore, recommend this book to introverts in particular, although extrovert readers will also gain a better understating of the introverts they work with, are related to, married to, or befriend. And who knows, they may even improve their investment performance!
Quiet: The Power of Introverts in a World That Can’t Stop Talking, by Susan Cain. Paperback Edition Published by Penguin Books, 2012.
AJ is an academic and a freelance financial journalist who has written for Sharenet for some 15 years. He spent 25 years as an accountant and financial manager in various South African companies before moving into academia. He has a broad range of interests, including all aspects of business and stock market investing. Apart from a bachelor’s degree in Accounting, AJ holds a Master’s degree in Financial Management. He is also a Fellow of the Chartered Institute of Management Accountants.