Jeopardy! and Gender Parity on Investment Teams
Why does gender parity matter for investment teams?
The first and most important reason is because it is the right thing to do. Seriously. Even if there was no return on investment (ROI) for equality, would you think it was okay to discriminate against half the population?
But apparently doing the right thing hasn’t been enough up until now. Morningstar data demonstrates that not only do male active mutual fund portfolio managers in the United States outnumber women by about 9 to 1 as of October 2017, the ratio has grown WORSE since 1990. Although the number of PM jobs has increased from 1,900 to 8,500, men have grabbed 85% to 90% of all the new positions.
For context, the percentage of CFA charterholders who are women is already too low: According to a 2016 CFA Institute study, about 18% of charterholders worldwide are women and about 16% in the United States. Those numbers have barely budged for 20 years now. But the gender divide for active fund managers is even worse than these statistics predict.
The first ROI argument for rough gender parity is foundational to fund management: Modern portfolio theory (MPT) teaches us that proper portfolio diversification along the efficient frontier is, in and of itself, a good thing that reduces risk and enhances returns. If diversity works for our portfolios, shouldn’t it work for our portfolio managers, too?
But a second ROI argument is implied by recent research examining the wagering behavior of contestants on the game show Jeopardy! For those not familiar with the show, in each episode, three contestants are quizzed on trivia and general knowledge. In the Final Jeopardy! round and when they land on Daily Doubles, contestants can place bets on whether they’ll deliver the correct response. The current version of the show has been running for more than 30 years and comprises a robust real-world data set.
In “The Gender of Opponents: Explaining Gender Differences in Performance and Risk-Taking,” the authors analyzed more than 4,000 complete episodes, and the betting habits of over 8,000 players, including 3,726 women and 4,443 men. (Full disclosure: On 11 March 2011, I was one those men; I came in last.) The researchers broke down each gender’s aggressiveness in making wagers, especially in the context of each match’s gender mix. They find that “women compete more aggressively, become (marginally) more competitive, and take on more risk when paired against men.” They also found that men “wager significantly less” when playing against women.
Why might this matter in terms of gender diversity in portfolio management?
As a former portfolio manager, from 1993 to 2005, I worked on mutual funds, pension funds, and venture capital, at all times on all-male teams, which is not unusual in the industry. Risk and aggressiveness are funny things. Too much caution is bad for portfolio performance on a risk-adjusted basis, but too much aggression is just as bad or even worse. Every portfolio manager seeks to find the sweet spot.
To me, the Jeopardy! paper implies a quick fix: To hit that sweet spot between caution and aggression, mix men and women together on your teams. The results may not have anything to do with innate biology, although they could, but what’s more likely, to quote the conclusion of the study’s authors, “social norms” lead men to become less risky and aggressive in mixed groups and women to become more so.
Other research further supports the benefits of gender parity. The French firm Sodexo has nearly half a million (not a typo!) employees worldwide. The company studied over 50,000 managers across 70 different corporate entities. Some management teams were all or almost all men, some were all women or nearly all women, and others were roughly at parity with between 40% and 60% women.
Across multiple measures of success, the Sodexo study found that more balanced teams outperformed their less diverse counterparts, with the improvements being both large — from 8 to 15 percentage points higher — and statistically significant.
I expect a similar sweet spot exists in active portfolio management. We should aspire to gender parity because it will enhance risk-adjusted returns, because we know the value of non-correlated asset managers, and because it is the right thing to do.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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1 thought on “Jeopardy! and Gender Parity on Investment Teams”
What surprises the most is the first assumption: that to have equal gender representation in finance is “the right thing.” The second most shocking assumption is the implication that unequal gender representation is automatically a product of discrimination. Both of these assumptions need at least some evidence. Otherwise, we should imply that whenever there is a demographic disparity in representation within a team, the less represented gender should be automatically regarded as discriminated against by the HR, even when the HR is by far a female-dominated domain (https://study.com/blog/why-is-the-hr-profession-dominated-by-women.html).
In respect to one thing, the article is almost right: There is no positive ROI on the horizon for firms determined to create gender-equal represented teams. The only missing piece of the truth is that the ROI is actually negative. In fact, the more (bio-demographic) diverse the team, the lower the performance (https://hbr.org/2019/11/why-investors-react-negatively-to-companies-that-put-women-on-their-boards). And this can also be very clearly seen in practice when we compare the MSCI Women Index to standard MSCI (https://www.msci.com/documents/10199/ee63066d-7b32-468a-8b3a-88560185f209).
On the other hand, I would warmly suggest not to use private companies research to prove an argument, and to only rely on academic studies. We have seen in the past the disasters that private consulting companies may lead to, also when talking about misinformed research about diversity.