The big idea: Jury duty for institutional investors
We let groups of strangers decide the fate of defendants in the criminal justice system. What if we let them decide asset allocation for pension funds?
I served on a jury last week. It was an interesting experience; lots of people have gotten out of jury duty (I certainly didn’t want to be picked), but I don’t know that many people who have actually served.
I can’t speak for other cases, but my experience struck me as pretty close to the idealized vision for a jury system. The jury took it seriously, thought critically about the evidence, and debated vigorously on what we thought it meant. If the system is supposed to facilitate fair debate and thinking among strangers, it seems to be pretty effective.
It got me thinking: are there other areas where there’s value in delegating from experts to a body of normal people? What if we applied the jury system to pension funds, endowments, and municipal money management — major investors whose returns dramatically affect the life of their beneficiaries?
A quick overview of investment management
Most institutional investment offices operate with the same broad structure:
A chief investment officer (CIO) oversees the day to day work: sourcing managers, rebalancing, writing memos, and executing investments.
An investment committee of some kind sets broad parameters on what can be invested in, from asset classes to risk tolerance.
A board of trustees sets the broad policies and asks why the line is not going up and to the right sufficiently.
This is…maybe fine, considering essentially every pension fund, municipal fund, and endowment looks something like this. But despite the oversight, in practice a huge amount of discretion lives in the CIO office. And that has some issues.
There’s academic evidence that CIOs are career-oriented, and that can misalign their incentives with the beneficiaries of the money. Younger managers disproportionately hug benchmarks and copy each others’ trades to minimize their career risk — being opinionated and wrong is the worst thing that can happen to them. The wonderful book The Counting House is a window into the agony of a fund manager that underperforms relative to his peers.
Maybe diffusing authority can help
On top of the existing system, what if we brought in an investment jury? This group of 12 randomly-selected laypeople would be the final decisionmakers on any investment for the fund, with full authority to deploy capital in line with the fund goals.
Over the course of their 6 month term, jurors meet weekly and are compensated enough to justify taking the time from work — let’s say $500 per meeting. During these meetings they hear from fund managers, read analyses by the fund staff, and make the final call on new investments.
Any new investment requires a supermajority of 10 — paralysis just means more T-bills in the portfolio and an angry investment committee. At the end of their session, the next jury hears about the state of the portfolio and decides if a rebalancing is necessary.
Of course, there still need to be guardrails in place. The investment committee and trustees would still be responsible for deciding what asset classes are allowed, how much risk the fund can take, liquidity requirements and other boring-but-important macro-decisions.
CIOs could also continue to play a role. In addition to executing the investments, they’d sort of play the role of the lawyers in a court case. After soliciting RFPs, meeting fund managers, and running due diligence, they’d be responsible for explaining to the jury what the investments are, the relative risks, and advise on how to interpret the facts. The CIO can act as a brake on poor decision-making, giving insight into why the jury might want or not want to invest in Uzbek oil fields.
Is it crazy to randomly select 12 people in Boston to decide whether Harvard’s $57 billion endowment fund pivots from private credit to real estate? Well, we literally do something like that for crimes that might put someone in prison. Juries award millions of dollars in lawsuits all of the time. They have to understand complex financial concepts for white collar prosecutions. I’m sure we can explain the time value of money and whether two and twenty compensation is reassuring or alarming.
Selecting a jury
Of course, there needs to be some process for making sure the right people are selected. Like jury selection, people in the area would receive a summons by mail. Groups of potential jurors would have to be questioned by the CIO and the board to look for conflicts of interest. There’d be an opportunity to strike jurors who can’t be fair and impartial. Which raises the question: who is the ideal juror?
A sovereign citizen who avoids the banking system probably gets struck. Hedge fund managers and venture capitalists probably need to go too — too much expertise, and the possibility of a conflict of interest. Large crypto holders feel similar, to avoid adding memecoin risk to the teachers’ pension plan.
But finance has become increasingly accessible to everyday people, which may drive stronger perspectives than the old-school “put your money with an RIA” crowd had. Meme stocks, Wall Street Bets, Crypto, and the popularity of shows like Billions and Industry have made opinions on finance and investing more common. Things like GameStop mania become cultural touchstones, separating the idea of investment for money from investment for fun. That might taint the pool a bit.
It’s not totally clear that’s a problem. There’s an idea in criminal justice called the CSI Effect: the idea that the popularity of courtroom dramas has changed jury expectations in a way that’s unreasonable. True crime has given random people strong opinions on the system, with mixed evidence that it impacts jury behavior. The justice system seems to chug on, and I’m sure the Bureau of Asset Management in New York City can survive a term of a Robinhood day trader.
At the end of the process, you might have 12 people who know enough to be dangerous. The guy who read Rich Dad, Poor Dad once. A fan of The Big Short. Someone who set up their 401(k) but never updated the default investments. The perfect brain trust to deploy billions into emerging market debt.
So, would a jury outperform traditional investment managers?
There’s plenty of research that groups of people working together outperform individual decisionmakers. MIT’s Center for Collective Intelligence has found that group performance is only moderately correlated with individual members’ intelligence; a group of normal people can potentially compete with top talent.
And investment managers have a complicated record. College endowments have largely underperformed the S&P500 since 2011 despite relatively aggressive asset allocation. While there are probably reasons for this — I assume the cash needs are different than just holding $SPY — herding might mute some of the skill benefit of professional managers. The same applies to pension funds, who have apparently performed worse than a 60/40 indexed portfolio since 2007.
Does that mean that a jury of investors would make better decisions? We don’t know — I couldn’t find any pension funds who thought it’d be fun to try something like this. But adding oversight might serve a few purposes: experts tend to be overconfident, and there’s some value in forcing an outside perspective.
Fundamentally, the bet is that there’s value in people who come in with a fresh perspective, take things seriously, and try to make the best decision they can. Based on my jury experience I think this might happen more than people expect — even if it’s not their money, knowing it impacts students, pensioners, and city officials means real stakes. Maybe they’d step up.
Things might get strange if juries decide
I have never been on an investment committee, but I imagine that pitches are designed for people with finance experience — lots of IRR waterfalls and portfolio theory. Part of the job of lawyers is to make sometimes-complex legal issues understandable for a group of laypeople. Fund managers will need to totally reinvent their approach, simplifying concepts and providing a clear roadmap to the ROI that jurors can expect.
Maybe this will de-jargon pitches and make them clearer, preventing complexity from overwhelming quality. But you could also imagine it going the other way, with managers appealing to emotion and pushing for an over-emphasis on familiar investments. Jury-friendly investments would become the new hot asset class, focusing on familiar names that will get rubber stamped quickly.
This desire to understand what plays for the jury would naturally bring a new career path: the jury consultant. These investment jury whisperers would be able to charge millions to fund managers to help them win over the random citizens their performance bonuses depend on.
This could be a massive market. The 50 largest institutional investors are collectively worth $41 trillion; if they can grab one basis point, that’s a $4 billion industry. Better yet, jury consultants can sell to both sides. After all, the CIOs also need help making their case to the jury.
The skills of a CIO would have to change in light of this. Rather than focusing entirely on relationships with fund managers, the best CIOs will look more like marketing or sales professionals — able to persuade random citizens to follow their advice on the right asset allocations.
The best CIOs might compete less on their return above benchmark and more on how well they can spin the jury. An unsuccessful CIO’s annual report might have to grapple with the memecoins in their university endowment.
Official idea rating
1.5/5. Even if it’s fun, I think getting a board of trustees to approve something like this will be impossible. If there’s one truism in endowment investment, it’s that nobody wants to do something different and look stupid. This is pretty different.
Still, it’d be interesting to see a fund allocate some share — maybe 5% — of their assets to experiment with something like this. Plenty of research finds that groups make better decisions, but nobody (to my knowledge) has really tested whether 12 random people can beat the best investment managers in the business.
Maybe there’s a brave fund out there willing to try. And if their endowment loses billions on GameStop, they can at least say it was a democratic decision.