BehavioralMattersInsights from the application of Behavioral Finance | Issue 38

By: Michael A. Ervolini, CEO

Intrinsic Value

INTRODUCTION

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.

Behavioral Matters is a series of essays on the application of Behavioral Finance written specifically for professional investors and portfolio managers.

© 2016 CABOT INVESTMENT TECHNOLOGY, INC. // INTRINSIC VALUE – ISSUE 38 | 2

“In business, it isn't enough for an idea to be original — the idea must also be useful,

appropriate and actionable.”

- Teresa M. Amabile

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.

TWO TYPES OF MOTIVATION

© 2016 CABOT INVESTMENT TECHNOLOGY, INC. // INTRINSIC VALUE – ISSUE 38 | 3

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

WHAT’S DRIVING YOU

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 alphasourcing teams as well as the traditional lone wolf

approach to asset management.

TIME-HONORED PRACTICES

© 2016 CABOT INVESTMENT TECHNOLOGY, INC. // INTRINSIC VALUE – ISSUE 38 | 4

“Money, while thought to be an all-purpose motivator, can actually crush creativity.”

“

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

IDEA GENERATION

© 2016 CABOT INVESTMENT TECHNOLOGY, INC. // INTRINSIC VALUE – ISSUE 38 | 5

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:

GETTING YOUR MOJO GOING

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.

A U T O N O M Y

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.

B O L D V I S I O N

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.

E L I M I N A T I N G R O A D B L O C K S

“Poor feedback forced individuals to make judgements based on weak intuitions, and

this too often leads to missed opportunities and poor performance.”

“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.

F E E D B A C K

© 2016 CABOT INVESTMENT TECHNOLOGY, INC. // INTRINSIC VALUE – ISSUE 38 | 6

CONCLUSION

REFERENCES1. 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," HarvardBusiness Review, May, 2007.

8. Teresa M. Amabile and Steven J. Kramer, "The Power of Small Wins," Harvard Business Review, May, 2011.

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.

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.

© 2016 CABOT INVESTMENT TECHNOLOGY, INC. // INTRINSIC VALUE – ISSUE 38 | 7

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research analysts improve. Using our

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their skills, investment processes and

behavioral tendencies. Clients then collaborate

with Cabot to implement pinpoint refinements

to the way they buy, sell and size assets.

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