The Diversity Project works to attract and develop talent within the investment and savings industry to deliver the best outcomes for clients, reflect the society we serve and secure a more sustainable future for the sector.
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.
Cognitive diversity is the range of expertise, experience, perspectives, preferences, traits and ways of thinking within a team. It can arise from differences in education, professional background, life experiences, cognitive style or personality and demographics – for example, age, gender and socio-economic background.
Based on written submissions and interviews, we selected Alex Edmans to conduct the research. Alex is Professor of Finance at London Business School and author of several books including May Contain Lies – How stories, statistics and studies exploit our biases and what we can do about it and Grow the Pie: How Great Companies Deliver Both Purpose and Profit.
Professor Edmans’ methodology covered two main aspects: an extensive literature review to uncover what primary research had already shown about cognitive diversity and structured interviews with investment professionals to explore practitioners’ experiences.
This new study shows when and how cognitive diversity works in an investment context.
The three main findings:
1. Cognitive diversity can create clear competitive advantages for investment firms.
A cognitively diverse team has a broader range of knowledge and viewpoints, is better equipped to notice blind spots and to combat individual team members’ biases. It also mitigates against the risk of groupthink, which can arise if there is pressure to show that we ‘belong’ by reinforcing the group’s view. In a cognitively diverse team there is less pressure to conform.
These benefits can be even greater in asset management than in many other sectors because:
a) investment decisions rely on analysing large and complex information sets,
b) there are multiple valid ways of interpreting this information and assessing risk and
c) different perspectives can help investors identify factors not priced in by the market.
2. But cognitive diversity also comes with potential challenges.
It may be harder for a team to share and use the more extensive information because members ‘speak different languages’. People may find it easier to interact with others with similar backgrounds or who are ‘like-minded’. They may also be less likely to debate ideas freely with someone if they do not feel the connection between them is strong enough to withstand disagreement.
If not managed well, diverse ways of thinking can also result in miscommunication, misunderstandings or friction and may slow decision-making. Firms cannot just ‘add diversity, then stir’.
3. Sophisticated leadership is therefore essential to harness the benefits and minimise frictions from cognitive diversity.
This includes the ability to create psychological safety, reward dissent and lead discussions effectively, drawing in different contributions from team members. This is intrinsically difficult but in a highly competitive industry well worth the effort, leading to more robust, better decision-making and client outcomes.
Other interesting findings;
- It is important to know when cognitive diversity should be used – not all tasks need it.
- Practitioners believe that cognitive diversity can be valuable in all areas of asset management, but particularly in equities.
- It is hard to hire for cognitive diversity. The makeup of the existing team and any skill gaps should play a bigger role.’
- Consistent with academic research, practitioners view skills diversity as particularly important.
- Demographic and cognitive diversity are different but there are important overlaps.
For further findings, please click here to read the full report or download an executive summary here.
The Diversity Project will work closely with its members to harness the benefits of cognitive diversity while minimising potential costs – focussing on the following six key actions:
1. Enhancing manager skillsets to bring out the best from teams
2. Optimising hybrid working
3. Developing hiring and retention efforts to ensure diverse talent joins and thrives
4. Working differently to harness the benefits of cognitive diversity
5. Measuring the effectiveness of decision-making
6. Recalibrating diversity and inclusion efforts
Why does this matter?
This groundbreaking research matters for a number of reasons:
1) The investment industry must always try to improve decision-making and results for our clients.
2) In an AI world it is important to remember the distinct capabilities of humans – one of which is our ability to think differently; to discuss and debate, to have a variety of perspectives, skillsets and opinions, to bring different views together and make informed judgements.
3) This sophisticated, more nuanced way of looking at diversity will help us to attract and retain the best and brightest talent, critical to future-proof the industry
4) The research is likely to be valuable for other ‘knowledge’ sectors.
5) The study reframes the current fractious ‘DEI debate’ by returning to the fundamental idea that diversity and inclusion improve decision-making and reduce the risk of groupthink. The conclusions are both intuitive and powerful.
For further information, please go to our microsite.
If you any questions, or would like to get in touch – we would love to hear from you via info@diversityproject.com
