Behavioral Matters:

Insights from the application of Behavioral Finance

Issue 38 – July 31, 2014

Behavioral Matters is a series of essays on the application of Behavioral

Finance written specifically for professional investors and portfolio
managers.

Intrinsic Value
In business, it isn’t enough for an idea to be original — the idea must
also be useful, appropriate and actionable.1
Teresa M. Amabile

Top investors identify great ideas ahead of the crowd, regularly. They
do this in part by digging into opportunities deeper, better, and faster
than the competition. Chief among their skills is the ability to
creatively uncover the strengths and shortcomings of companies that
others just don’t see. Tenaciously pursuing ideas that are both novel
and valuable requires lots of motivation, more than is believed to be
provided by the pursuit of fame and wealth or the avoidance of
criticism. This essay examines the concept of intrinsic motivation and
its role in filling your portfolio with great ideas.
Types of Motivation
There are two basic sources of motivation. One is extrinsic, which
originates outside of ourselves, and the other is intrinsic, which flows
from within. Extrinsic motivation is the result of being subjected to any
of a myriad of carrots or sticks. Carrots include financial rewards,
sincere compliments, professional recognition, and bragging rights.
Sticks include financial penalties, lost privileges, criticism, and
humiliation. Extrinsics are designed to motivate individuals to comply
or conform with externally imposed goals.

Intrinsic motivation involves the natural alignment of what you want

with what’s needed. “Intrinsic motivation has been defined as
performing behaviors out of interest, pleasure, and enjoyment.” 2 This
type of motivation tends to be stronger and self-perpetuating, in that
intrinsic desire spurs creativity and success, which in turn fosters more
motivation, which propels one to further success, much like the
fanciful perpetual motion machine. Harnessed effectively, intrinsic
motivation can enable you to perform at your best over long stretches
of time.

What’s Driving You

Teresa Amabile and Steven Kramer are experts on what motivates and
demotivates high performance professionals, or what they term
“knowledge workers.” Among their investigations, they’ve examined
various work attributes believed to affect a person’s creativity and
motivation. A central finding from their research directly challenges
many of the long-standing beliefs and practices used in business,
particularly within money management companies. These researchers
explain, “…we discovered the progress principle: of all the things that
can boost emotions, motivations and perceptions during a workday,
the single most important is making progress in meaningful work. And
the more frequently people experience a sense of progress, the more
likely they are to be creatively productive in the long run.”3

After years of study across hundreds of professionals engaged in

creative work, Amabile and Kramer observe, “When we compared
people’s best days with their worst, the most important differentiator
was being able to make progress in the work.” They continue,
“Motivations were also affected: On progress days, people were
intrinsically motivated — by interest and enjoyment of the work itself.
On setback days, they were not only less intrinsically motivated but
also less extrinsically motivated by recognition.”4

2
Time-Honored Practices
What about compensation and competition as motivators? Extrinsic
motivators like these can help, but they do a much better job when
they are aligned with the individual’s internal drivers, which more
often than not are improving one’s skills, advancing the company or
group toward a shared goal, or other emotionally significant aspiration.
Money, while thought to be an all- purpose motivator, can actually
crush creativity. In discussing the use of incentive pay to encourage
creativity, Daniel Pink offers this perspective: “Here’s what you
shouldn’t do: Offer an “if-then” reward to the design staff. Do not
stride into their offices and announce: ‘If you come up with a poster
that rocks my world or that boosts attendance over last year, then
you’ll get a ten-percent bonus.’ Although that motivational approach is
common in organizations all over the world, it’s a recipe for reduced
performance. You’ll likely get activity — but not much creativity.
Creating a poster isn’t routine. It requires conceptual, breakthrough,
artistic thinking. And as we’ve learned, “if-then” rewards are an ideal
way to squash this sort of thinking.”5 The question then is, are the
extrinsic incentives you have in place creating or destroying alpha?

Competition can backfire as well, especially if it is used to pit

colleagues against each other. “In a dramatic rebuttal to the
commonplace claim that high pressure and fear spur achievement, we
found that, at least in the realm of knowledge work, people are more
creative and productive when their inner work lives are positive, when
they feel happy, are intrinsically motivated by the work itself, and
have positive perceptions of colleagues and the organization.
Moreover, in those positive states, people are more committed to the
work and more collegial toward those around them,” 6 according to
Amabile and Kramer. This suggests there may be a place for alpha-
sourcing teams as well as the traditional lone wolf approach to asset
management.

Idea Generation
Great investment ideas are scarce, and a lack of intrinsic motivation
can make them harder to find. Intrinsic motivation is not, however, a
constant state, but rather is nourished or starved by the numerous
large and small experiences you encounter throughout the day. To this
point, Amabile and Kramer find that work life is laden with
opportunities for intrinsic motivation to be heightened or smashed. In
their words, “People experience a constant stream of emotions,
perceptions, and motivations as they react to and make sense of the
events of the workday.”7 These researchers also have a good handle
on what boosts intrinsic motivations and what doesn’t: “There are
predictable triggers that inflate or deflate inner work life, and, even
accounting for variation among individuals, they are pretty much the
same for everyone.”8

3
Getting Your Mojo Going
Process and culture are critical to achieving strong and consistent
outcomes in any organization, and they are especially important in
asset management. This operational duo can be used to enhance inner
work life, intrinsic motivation, and creative thinking as well. Here are
four ideas that can help:

 Bold vision. Individuals find more intrinsic motivation when

pursuing a well-defined goal that is important, even potentially
world changing; requires mastering new skills or stretching
beyond current abilities; and is clearly linked to achieving the
goals of the business or its clients. Intrinsic motivation is
dampened when goals are murky or shifting, when the primary
focus is to meet what appears an arbitrary deadline, and when
individuals are pushed to earn an if-then reward.

 Autonomy. People are more intrinsically motivated when they

perceive their daily activities as self-directed rather than
externally imposed. This provides seamless alignment between
the needs of the individual and the organization. Autonomy is
engendered when goals are clear, cultural norms are
supportive, and there is acceptance of some mistakes along the
way. Micromanagement, excessive criticism, and shifting
priorities decimate one’s sense of autonomy.

 Eliminating roadblocks. Intrinsic motivation flows best when the

necessary resources are available, and when sufficient time is
allocated for the task. Energy not spent overcoming your
company’s business and cultural shortcomings can go directly
into advancing the portfolio’s performance. On the other hand,
permitting road blocks to persist produces stress, which is a
well documented killer of creativity and intrinsic motivation.

 Feedback. Creativity necessitates engaging in lots of small

experiments and taking risks. Building timely and appropriate
feedback into your processes can enable individuals to learn
where their intuitions and judgments work best and where
collaboration with others and benchmarking can help. Poor
feedback forces individuals to make judgments based on weak
intuitions, and this too often leads to missed opportunities and
poor performance.

Conclusion
Investing requires sustained motivation and creative thinking.
Harnessing the power of intrinsic motivation can help keep you in the
top quintile. Fostering more intrinsic motivation and creative thinking
is as basic as helping everyone in your company be productive in ways
that are important to clients and your bottom line, and that means
generating alpha.

4
 Sustained, competent research is the backbone of fundamental
management. Smart and creative analysis is supported by offering a
bold vision to shoot for, promoting autonomy, eliminating roadblocks,
and providing rigorous and granular feedback regarding the context in
which the best decisions are typically made. Equally important, there
needs to be a culture that values great effort that works frequently,
but occasionally delivers a bad idea. Otherwise, you’ll motivate
individuals to borrow conviction from others, rather than develop it
themselves.

Notes
1. Teresa M Amabile, “How to Kill Creativity,” Harvard Business
Review, September, 1998.
2. Alan S. Waterman, “When Effort is Enjoyed,” Motivation and
Emotion, September, 2005.
3. Teresa M. Amabile and Steven J. Kramer, “The Power of Small
Wins,” Harvard Business Review, May, 2011.
4. Ibid.
5. Daniel H. Pink, Drive: The Surprising Truth About What
Motivates Us, New York: Riverhead Books, 2009.
6. Teresa M. Amabile and Steven J. Kramer, “The Power of Small
Wins,” Harvard Business Review, May, 2011.
7. Teresa M Amabile and Steven J. Kramer, “Inner Work Life:
Understanding the Subtext of Business Performance,” Harvard
Business Review, May, 2007.
8. Teresa M. Amabile and Steven J. Kramer, “The Power of Small
Wins,” Harvard Business Review, May, 2011.