On Choosing A Money Manager, Your Instincts Are Probably All Wrong: Study

When it comes to money, don't trust your gut. It'll probably be wrong, according to new research examining how people make investment decisions.

The study conducted by Warwick Business School, University College London and Dartmouth College looked at how facial appearances influence people's willingness to trust someone with their money. Researchers discovered a tendency to give cash to those believed to have a trustworthy face despite a lack of additional information.

"People tend to be basically rubbish at finding out who is a cheater, who is trustworthy, who is not trustworthy," the study's lead author, Constantin Rezlescu, told The Huffington Post. And yet people make those split-second judgments and rely on them to inform important financial decisions, concluded Rezlescu, a University College London doctoral student in psychology, and his colleagues.

Rezlescu and his coauthors devised a crafty set of experiments to determine how much facial appearances influence the willingness to trust someone with money. Using computer images, the researchers created 20 pairs of faces including a "trustworthy" and "untrustworthy" version of each.

To create the two types of faces, researchers borrowed from an earlier study that identified facial features that people intuitively tend to find trustworthy, including wider eyes and upturned lips, both of which are precursors to smiling. Conversely, the untrustworthy faces had squinty eyes and downturned mouths more reminiscent of anger, according to Brad Duchaine, an associate psychology professor at Dartmouth and one of the paper's authors.

The researchers then gave volunteers a lump sum of virtual cash and asked them to invest however much they wanted with the person whose face flashed on a nearby computer screen. As the trustworthy and untrustworthy faces scrolled across the screen, with no addition information provided, the volunteers selected the faces that they would invest with. Their choices led to 42 percent more money being placed with those with the trustworthy faces.

"We make this spontaneous judgment that we don't have any control over and that we may not even be aware of making the moment we make it," explained Rezlescu, referring to the decision based on their looks. "It's quite a puzzle … because when you look at somebody and perceive them as trustworthy, that doesn't mean they actually are trustworthy. And yet people continue to make decisions to trust their gut instincts."

The volunteers saw the wider eyes and upturned lips, subconsciously interpreted those faces as smiley and happy, and took perceived happiness to be trustworthiness and decided to give their money to the associated individuals, the researchers believed.

Researchers did a second experiment. Still using the same faces, the scientists provided the volunteers with a color-coded graphic showing whether a face had realized a profit with nine prior investments. Despite the provision of hard data, the participants invested 6 percent more of their money with those with the trustworthy faces, indicating that humans can be influenced by subtle and subconscious cues even when presented with concrete facts.

"Reputation matters a lot but here we show that even when you know the person's reputation, you are still influenced by their face," Rezlescu said. "The trustworthy faces are still receiving a premium."

So what does this mean for a consumer looking for a financial adviser, banker, investment manager or any other business associate? Depends on whom you ask. Duchaine continues to believe there is still value in meeting face-to-face with potential partners. "Although little evidence suggests facial structure indicates how trustworthy someone is, other sources of information about a person such as their body language and speech probably do convey valid information," he said.

But Rezlescu disagreed. "If you want to make sure that you make decisions based only on objective information, you are probably better off meeting by phone," he said. "Avoid face-to-face interactions. Even if you don't realize it, those face-to- face meetings may still influence your decision."

"Sometimes you'll get it right but sometimes you'll get it wrong because those trustworthy impressions may signal the right guy or the wrong guy," he said about the in-person meetings.