New study by Professor Alex Edmans finds cognitive diversity can give investment teams a significant edge – but only if managed well.
In 2024, the Diversity Project invited academics from around the world to submit research proposals to explore any linkage between cognitive diversity and the performance of investment teams. We stressed that we wanted to know what the evidence showed, not work backwards from any conclusion we might hope to see. We commissioned Professor Alex Edmans for this important research.
The original common-sense goals behind diversity initiatives – to improve decision-making, mitigate the risk of groupthink, hire and develop the best people and give all talent a fair shot – have been lost amidst a politicised battle. Rather than discuss differences thoughtfully or objectively, debaters are divided along ideological lines. Professor Edmans’ new research reclaims this debate by considering the evidence.
For the purpose of this research, Cognitive Diversity has been defined as the range of expertise, experience, perspectives, preferences, traits and ways of thinking within a team. It can arise from differences in educational background, professional background, life background, cognitive style or personality and demographics.
Introduction Video
The research reaches three main conclusions:
Cognitive diversity can create clear competitive advantages for investment teams.
The range of information for investment decisions can be limitless and open to a wide range of interpretations. Cognitive diversity leads to a greater range of perspectives, mitigates the risk of groupthink and in a world increasingly dominated by AI, helps investors to identify factors not priced in by the market. The most valuable sources of diversity are different skills sets and professional backgrounds.
Cognitive diversity also comes with challenges.
Different ways of thinking can lead to miscommunication or friction if not managed well. Diverse teams may also experience slower decision-making, as integrating conflicting viewpoints may lead to dilution or paralysis. Affinity and cohesion can be weaker among colleagues with different backgrounds. It is also vital to understand where cognitive diversity adds value: it is especially helpful in complex situations but can be unhelpful when carrying out mechanistic tasks.
Sophisticated leadership is essential to harness the benefits and minimise the costs from diverse thinking.
The best-performing teams have leaders who create an environment where dissent is encouraged but also know when to move forward and which views to prioritise. Psychological safety is essential to bring out contrarian views: great investment is about pursuing outlier ideas. Managing diversity may be difficult but when done well, the payoff is substantial: more robust decision-making and better client outcomes.
Priority actions
This study offers a roadmap for how diversity can move from being perceived as a special interest issue to being core to business strategy. The Diversity Project suggests six priorities to help the investment industry realise the benefits and diminish the costs of cognitive diversity:
- The role of managers and leaders
- Implications for hybrid working
- Implications for recruitment
- Working differently to harness the benefits of cognitive diversity
- Monitoring the effectiveness of decision-making
- Navigating the backlash and recalibrating diversity and inclusion efforts
We have a collective opportunity to lead the change. We encourage you to share this research widely – within your firms, with your teams, and across your networks. Use it to spark conversations, challenge assumptions, improve investment team performance and shape more a inclusive industry.
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