Meet Dan Ariely, the hedge fund star who never looks at financials

Dan Ariely hasn’t looked at a profit and loss statement or a balance sheet in the past five years. And yet his hedge fund, Irrational Capital, has smashed the S&P 500 even during one of the longest bull markets in history.

The story of how the Duke University professor has achieved this feat was yet another one of the highlights from the excellent Sohn Hearts and Minds conference in Melbourne on Friday.

Ariely, who was brought to Australia by Gary Weiss’ investment firm Ariadne, is an expert in what motivates people, and it is that knowledge that he has used to create his hedge fund.

His entertaining presentation centred on an example of how Intel tried to motivate workers in one of its computer chip-making factories. The workers were doing a four-day week, and Intel decided it would pay a $30 bonus on the first day of the week, if a certain production target was hit, to kick the week off on a good foot.

Ariely provided some advice and the workforce was split into four groups to allow an experiment to be run. A quarter of the workers were paid the $30, a quarter were given a $30 pizza voucher (Ariely wanted to send a $30 pizza to their home, but this was too complex), a quarter were sent an encouraging text message from their boss and the last group were given nothing.

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The results were fascinating. Cash worked well on the day, but then output plummeted. Pizza better than cash on day one, and output fell more gradually across the other three days. The verbal reward also did better than cash on day one, and the motivation of these workers stayed highest across the week.

Ariely’s point was that money is the motivator many think it is. Incidentally, he offered to apply the lessons to the bonus scheme of Intel’s executive, but he says they were quite cool on the idea.

What does matter is goodwill, which Ariely defines as the gap between the minimum effort an employees makes to keep their job, and the effort they make when they are fully engaged.

Key factors

Ariely’s study of the factors that motivate employees, and create goodwill, led him to the creation of Irrational Capital, and the Clear Motivation Index. This is built on 12 years of data on S&P 500 companies, tracking a range of factors around employee engagement – and paying zero attention to financials.

In the past five years, the index has risen just over 100 per cent. But comparison, the S&P 500 Index has risen 52 per cent.

Not all motivating factors are created equally.

The aspects that matter most to staff include having their work appreciated, management transparency, safety, openness, fairness, a caring environment and the valuing of honest mistakes.

Less important factors include pay and other benefits, training, special recognition, expected tenure, job titles and the physical work environment.

Ariely says every CEO he meets says his people are his greatest asset. But the performance of Irrational Capital’s index against the market suggests that not all leaders walk the talk.

“We need to get companies to start looking inside, paying more attention to human capital and investing based on that human capital,” Ariely said on Friday.

James Thomson

j.thomson@fairfaxmedia.com.au

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