What Makes A Great Leader: Locus of Control

What makes a great leader? Great leaders are admired and remembered. Civilizations have written stories and erected statues in their honor. You can find thousands of reasons why someone is a great leader but ultimately it boils down to how well an individual leads themselves. Undoubtedly millions of pages have been written throughout history, by people attempting to diagnose not only the characteristics of a great leader but also to describe and articulate the leader’s internal thought processes and spirit. As part of a special blog series, we will explore some of the elements of this self-leadership or self-mastery – how a great leader’s mind works, logically, emotionally, and spiritually (also called the seeds of influence). The first element of a great leader that will be reviewed is Locus of Control.

Individuals who believe that their destiny is in their own hands and that most of their actions directly impact their future are generally happier and more successful than their counterparts. This ability is defined as an internal locus of control and the converse known as an external locus of control. Those with a dominantly internal locus of control can be classified as “internals” and those with a dominantly external locus of control as “externals”. Individuals may be classified along this continuum depending on their locus of control, as depicted below.

The spectrum of locus of control
Source: MindTools.com  

Where internals believe their hard work, decisions, and plans determine their future, externals believe that outside forces such as luck, chance, or fate determine the future or outcomes and that the result is independent of their actions.

Why is this important for Leaders?

Knowledge of the intricacies of locus of control and how it affects behavior is a key part of effective leadership. Traditionally, successful leaders are thought to have a greater internal locus of control and less successful leaders with a lower internal locus of control. Despite this belief and the conclusion that an internal locus of control is associated with greater happiness or success in individuals, some studies offer different views where higher levels of success are displayed in individuals with a strong external locus of control.

Additionally, unhappiness has been reported in individuals with a strong internal locus of control and it is therefore suggested that a balanced combination of internal and external locus of control results in optimal levels of happiness. This is also described as a move towards a collaborative and altruistic leadership style and away from traditional narcissistic or dictatorial styles.

What Increases Your Locus of Control?

Self-Determination

Successful people believe that they are doing what they choose to do because they choose to do it. Self-determination is a key characteristic of successful people, as this severely restricts the impact of outside forces on the individual’s goals. Self-determination also creates intrinsic motivation which is the strongest form of motivation and is more likely to result in continued success.

A simple example of self-determination is exercise. Regular strenuous exercise requires discipline and as it consumes your time and can be painful at times. It is observably much easier to sit on the couch and mindlessly watch series on Netflix. However, the changes to your body, overall fitness, health, and other physical improvements as a direct consequence of your self-determination are a product of a strong internal locus and can create a positive cycle of reinforcement. These are also important components of self-care.

Self-determination may lead to joy, part of a internal locus of control

Optimism

Often self-determination alone is not enough to achieve success, there must also be an accompanying belief that success is possible. By thinking positively and believing that your goals may be achieved through your actions, your internal locus of control will improve. However, a word of caution pertaining to the combination of self-determination and optimism. It can result in “superstitious behavior’’ where correlation and causality may be confused, resulting in difficulty changing dysfunctional behavior such as arrogance and narcissism.

Other enablers that may increase your internal locus of control include self-confidence, positive reinforcements, self-evaluation, and motivation.

What Decreases Your Locus of Control?

Belief in Fate

Believing in fate or destiny essentially means that an individual believes that all choices are predetermined and that a future has already been decided for them. It is an attitude often summarized by the phrases “It is meant to be”, or “Everything happens for a reason”. Whilst some people may find fulfillment that a cosmic force in the form of religion, supernatural believes, star signs, or otherwise determine their future, others may find it disempowering or even disheartening that no matter what they do, they cannot escape the inevitable. This disarmament of choice and free will in the mind of the individual builds an extremely strong external locus of control.

Religion and supernatural beliefs do not necessarily indicate an external or internal orientation, and adults may move towards an internal locus of control as their perceptions mature, and their agency increases. Furthermore, the perspectives of the parents and their role in introducing religion into the lives of their children have a greater impact on their children’s orientation than religion itself.

Another important factor is the ability to separate your belief in destiny or fate from religion. As we age we might realize that we are able to decide our own future through our own decisions and our outcomes are not predetermined by supernatural forces. This may be realized through the understanding that multiple “predetermined” outcomes are possible under the belief structure, putting more emphasis on individual choice than previously thought possible.

Hopeless is a dead end and part of a external locus of control

Hopelessness

There is good support in academic literature for the link between hopelessness and a high external locus of control and perpetuating cycles that may develop. People with this are burdened with a sense of hopelessness may suffer from depression, emotional withdrawal, and stress-related health issues. Burnout also comes into play due to sheer exhaustion and perpetual stress. Developing an internal locus of control is a means of eliminating these negative aspects, together with support from friends, family, and professionals.

Other stumbling blocks that may include low self-esteem, lack of motivation, powerlessness, and dependency.

Conclusion

A strong internal locus of control is necessary for the mind of a great leader. These leaders are able to guide themselves towards their dreams and goals with the belief that their hard work and determination will lead them to the future they desire. However, we also know that an internal orientation must be balanced with a sense of mindfulness, self-reflection, and grounding in the leader to prevent the creation of a narcissist, often thought of as the worst kind of leader.

How Can I Determine My Locus of Control?

Fortunately, there are several online tests available that can tell you where you lie on the spectrum. I recommend either mindtools.com or the original test developed by Julian Rotter in 1966.

Description of internal vs. external locus of control
Source: kgrierson.com

Sources:

Anderson, C. R., & Schneier, C. E. (1978). Locus of control, leader behaviour and performance among management students. Academy of Management Journal, 21(4),

Andrisani, P. J., & Nestel, G. (1976). Internal-external control as contributor to and outcome of work experience. Journal of Applied Psychology, 61(2), 156–165.

April, K., & April, A. (2007). Growing leaders in emergent markets: leadership enhancement in the new South Africa. Journal of Management Education (Vol. 31).

April, K., Dharani, B., & Peters, K. (2011). Leader career success & locus of control expectancy. Academy of Taiwan Business Management Review, 7(3), 28–40. Retrieved from

April, K., Dharani, B., & Peters, K. (2012). Impact of locus of control expectancy on level of well-being. Review of European Studies, 4(2), 124–137.

Cho, Y. J., & Perry, J. L. (2012). Intrinsic motivation and employee attitudes role of managerial trustworthiness, goal directedness, and extrinsic reward expectancy. Review of Public Personnel Administration, 32(4), 382–406.

Goldsmith, M. (2008). Helping successful leaders get even better. Business Strategy Series, 9(3), 95–103.

Manichander, T. (2014). Locus of control and performance: Widening applicabilities education. Indian Journal of Research, 3(2), 84–86.

Neal, M., Weeks, G., & DeBattista, J. (2014). Locus of control: A construct that warrants more consideration in the practice of couple therapy. The Family Journal, 22(2), 141–147.

Prociuk, T. J., Breen, L. J., & Lussier, R. J. (1976). Hopelessness, internal-external locus of control and depression. Journal of Clinical Psychology, 32(2), 299–300.

Rotter, J. B. (2004). The social learning theory of Julian B. Rotter.

Thomas, W. H. N., Sorensen, K. L., & Eby, L. T. (2006). Locus of control at work: a meta-analysis. Journal of Organizational Behaviour, 27, 1057–1087.

The Rise of Technology Stocks

Anyone interested in Economics or Finance would be aware of the astronomical gains made by Technology stocks in the past few years, particularly those listed on the NASDAQ. The NASDAQ stock market is the world’s second-largest stock exchange, just behind the New York Stock Exchange (NYSE), and is known for its price volatility. Stocks listed on the NASDAQ are concentrated in technology, biotechnology, financial services, media, communications, retail, and transportation.

The FAANG Stocks

When it comes to technology stocks, the most famous amongst them are part of the group commonly referred to by the FAANG acronym – Facebook, Amazon, Apple, Netflix, and Google (Alphabet). Other notable technology stocks in the same league as the FAANG stocks (but not included in the acronym just to keep it short) are Tesla, Nvidia, and Microsoft.

Source – Forbes

The FAANG stocks are renowned for their great returns and market capitalization. Funds have even been established that specifically follow these stocks and other large tech companies on the NASDAQ. At the time of writing, $10,000 total invested into FAANG stocks five years ago would be worth almost $50,000 today, a return of 400%! In comparison, the NYSE Composite (an index tracking the NYSE) delivered a return of 29% over the same period. This can be explained by the societal embrace and trends towards the technologies on offer (Social Media, Online Shopping, Digital Entertainment, Computer Systems, Software, and Communication.)

An example of a FAANG tracking index – Source: Intercontinental Exchange

Furthermore, there is a lot of hype among investors and speculators alike around the 4th Industrial Revolution. Essentially, the 4th Industrial Revolution refers to an ongoing evolution in society and manufacturing to favor mass automation using cyber-physical systems such as artificial intelligence, robotics, the Internet of Things (IoT), and other cutting edge technologies. Buyers of FAANG and other technology stocks hope to capitalize on this trend.

The 4 Industrial Revolutions – Source: Kemp Blog

The 2020 Global Economic Crash

In 2020, the global economy witnessed one of the greatest crashes in history due to the COVID-19 pandemic and uncertainty regarding an oil price war. During March 2020, global markets had declined by approximately 25%. Lockdowns initiated across many nations led investors to fear that many businesses would not survive and unemployment would soar. Furthermore, hospitals would be overloaded with the sick and mass fatalities would be seen, further crippling the workforce.

As most businesses with brick and mortar stores or traditional business models came to a grinding halt during lockdowns, only those that could overcome these constraints could continue to operate and generate revenue. Technology stocks were directly positioned to take advantage of this. A good example is Zoom Video Communications Inc., which is a leading voice and video conferencing software company. With mandatory social distancing in place, business continuity required communication between all employees, and Zoom provided the perfect means for this. Ordinary individuals also used Zoom to connect with friends and loved ones during this period.

Zoom in use for a video conference – Source: The Guardian

The stock price of Zoom rose from $68.04 on the 1st of January 2020 to a peak so far this year of $457.69 on the 1st of September 2020, an increase of almost 7 times. People around the world longed to continue their usual routine and go on with their lives as before, albeit as safely as possible. This led to a surge in online shopping, digital entertainment demand, and online communication. Fortunately, the companies on the NASDAQ and technology stocks were ready and able to meet these needs. During this period, the US Federal Reserve provided the largest economic bailout on record to assist flailing companies and prevent further rout. This act emboldened investors to stick to high returning technology stocks.

Many countries are now over their initial COVID-19 infection peaks, with travel bans lifted and businesses reopening. It would be expected that the demand for technology stocks would then lessen and the stock price would drop as the demand for their service would lessen. However, the opposite has happened and these stocks continued to rally. Seen as a haven from further global economic risk, investors continued to purchase these stocks and the prices continue to rise.

The Problem with Technology Stocks

The price-earnings ratio, also known as the P/E ratio is a ratio between a company’s share price and its earnings per share. This ratio is an excellent rule of thumb used to determine whether a company is overvalued or undervalued. Simplistically, by comparing P/E’s of similar companies, we can determine if a company’s stock is a good buy or not. At the time of writing, companies on the NASDAQ have an average P/E of 35 and in comparison, companies on the NYSE Composite have an average P/E of 21.9.

Source: CFI

Generally speaking, this suggests that technology stocks may be overvalued or investors expect higher earnings in the future. Buyers of high P/E stocks are also more interested in capital gains based on an increasing stock price over time, rather than earnings in the form of dividends. P/E ratios also help investors determine the payback period for their investment. For example, if a company had a share price of $60 and the latest earnings per share was $3, it would take 20 years (Price divided by Earnings) to recoup the share price, assuming constant earnings.

Steins Law was proposed by Herb Stein in 1976 while analyzing economic trends. It states that “if something cannot go on forever, it will stop eventually”. It is suggested that such a process will stop of its own accord if there are limiting external factors. We can apply this law to rising stock prices. These prices cannot keep climbing indefinitely, as a point would eventually reach where their market caps would exceed the total wealth of the world. This cannot happen. By this logic, the exorbitant prices of tech stocks will stop rising eventually – but when?

Source: FinSec Partners

Conclusion

If Stein’s law suggests the technology stocks will stop climbing at some point in the future and the high P/E ratio suggests overvaluation, we can conclude that a stock price correction will soon occur. This correction would result in more realistic P/E ratios and create a speed bump in the stock’s price rise. As of 3rd September 2020, this process began with a minor correction as the NASDAQ fell 6% lower from an all-time high, although a slightly lower drop was experienced in the NYSE Composite on the same day. This suggests a more skeptical economic outlook from investors rather than specifically a decrease in faith in technology stocks. A more reasonable explanation is that investors have chosen to sell their stocks to capitalize on their gains generated over the past year.

I’ll leave you with a quote from Warren Buffet, “Be fearful when others are greedy, and greedy when others are fearful”. Great returns may be reaped during this time but also at great personal risk. As tempting as technology stocks may seem, we must be mindful that what goes up, must come down.

Source: Imgur