For most lay investors, figuring out how to allocate money presents a dilemma. A dizzying maze of experts, investors, fund managers, and advisors exists to allow people to outsource their questions to a financial professional who can make responsible decisions on their behalf to grow savings. But to reliably figure out who won’t rip them off or make bad calls, regular people have to know so much that they could almost invest the money themselves in the first place.
Finance writers and others in the guidance-giving business offer some shortcuts to try to keep things simple. These range from the objectively good—making sure that the people in charge of money have an obligation to put clients’ interests first, without which they’re likely to look out for themselves and their employer—to the more dubious and superstitious-sounding. To wit: One famous old rule has it that clients looking to hand over their money should avoid advisors who drive flashy sports cars, since they’re likely to be risk-prone, unscrupulous, or both. Conversely, those with a practical, low-thrills car are said to perform better.
Turns out, this is one of those bits of folk wisdom that happens to be true. A group of researchers from NYU’s Stern School of Business, the University of Central Florida, the University of Florida’s Warrington College of Business Administration, and Singapore Management University set out to test it empirically, looking at a sample of 1,774 vehicles owned by 1,144 hedge-fund managers. Based on information that financiers are required by law to disclose to the government, he and his fellow researchers looked up publicly-available data on car purchases, and matched the hedge-funders to the autos. Sure enough, high-performance cars signal low-performance investors: The study finds that leadfoots make more trades, bring in smaller returns for clients, exhibit a greater volatility in the returns their investments earn per year, and are more likely to have been caught violating financial regulations.