Like the proverbial carrot, when incentives are dangled in front of portfolio managers, they’ll work harder to meet their targets – even if your money is at risk.
New research from Assistant Finance Professor Shyam Venkatesan shows portfolio managers are taking more risks in hope of beating the benchmark, because their performance contracts reward them for outperforming, and that risk-taking costs investors $26 billion per year on average.
“Performance is directly affected by incentives. If you give people something, they’ll work harder for it, but what functional form that incentive takes is something we need to work toward,” he said.
