Thu, January 25, 2018
Can the investment sector learn from investors and embrace cognitive diversity? It should because LGBT people may have a tendency to lean towards different biases from those of the majority.
Behavioral biases hit all investors and can vary depending upon the investor type. These biases can be cognitive, illustrated by a tendency to think and act in a certain way or follow a rule of thumb. But biases can also be emotional: a tendency to take action based on feeling rather than fact. Collectively when shared amongst groups of people, it results in ‘group think’ or ‘herding’.
Herding is in evidence all around us: in business, in the consumer world and particularly in investing. But why does herding happen?
The reality is that ‘group think ‘or ‘herding’ is natural, we all feel comfortable when we are around people who have common perceptions, experiences and perspectives. This is true for all groups including within the LGBT community.
The evidence suggests that bias can be amplified in complex situations where the “right way” to act is ambiguous yet the importance of being accurate is critical. Investing, then, offers perfect conditions for bias to operate in an exaggerated way, giving rise to the herd behaviour that can drive bubbles and bursts.
A number of investment companies recognise this in investors and see how when stock markets are falling, there is a strong pull on investor emotions to fall into the loss aversion bias that encourages them to sell if they see others doing so. Buy why? The evidence from behavioural finance suggests the answer to this question could be surprisingly irrational – that people sell because others are selling. Herding and group think are actively being played out.
However, when we start to look at diversity in investors we also notice different biases at play that do not always join or mirror the dominant herds.
BlackRock’s last Global Investor Pulse Survey revealed that when it comes to saving for retirement, findings show a gap between LGBT men and women. Close to six in 10 LGBT men have started saving for retirement, compared with just 47% of LGBT women. This inertia is similarly reflected in the significant cash piles that LGBT women are sat on, coming in at an average of over three quarters of their savings and investments. The same figure is much lower among LGBT men, at 57%. Non-LGBT women are similarly risk averse, with 73% in cash, while the average British person holds a much lower figure of 67% in cash.
The impact of this in investment mentality demonstrates a different kind of bias at play. LGBT women who are risk averse are less likely to follow herds that sell short term and keep investments for the long term despite any loss aversion messages being put out and LGBT men have the most diversified investment portfolios across the entire Pulse survey.
If understanding the rationale and importance of how these different biases in diverse groups of investors may emanate from, then so is diversity in companies themselves. It is no surprise that companies with LGBT insight specialists are succeeding. Identity diversity is important as is cognitive diversity which mirrors smaller groups of investor’s perspective and not that of the general herds. In many cases those smaller groups may have just got it right.
The lesson for companies now is that in the same way investors can fall into ‘group think’ so can hiring managers. If we keep recruiting in our own image and in the same pool we will keep the ‘group think’ intact and remain stagnant compared to those companies who are embracing cognitive diversity and the creativity it brings with it.