It is no secret now that we humans are beset with a raft of behavioral biases. Tim Richards at the Psy-Fi Blog did a nice job of providing an A to Z list of behavioral biases that beset us as investors.
One area that is getting more attention of late is the role of gender bias in business and investing. Andrew Ross Sorkin at Dealbook today looks at the phenomenon of female CEOs coming under disproportionate pressure from activist investors. Although only 23 of the 500 companies in the S&P 500 are led by women they seem to be more common targets.
Sorkin cites research showing that a “subconscious gender bias” is present in the business world. If your subconscious vision of a CEO is a white haired, middle aged man then it goes without saying that a female would represent a challenge to that worldview. Per the Psy-Fi Blog combating the “representative heuristic” isn’t easy and requires explicit research to avoid these damaging “mental shortcuts.”
That may help explain when female-led companies come under unique scrutiny. It may also be the case that women (and minorities) are hired into the top position of companies that are already undergoing some stress. Researchers call this the “glass precipice.”* This would also attract the attention of activist investors as well.
Some countries like Germany are enacting gender quotas for corporate boards with the hope that a more diverse board would eventually lead to more diverse outcomes. Many women in the US are skeptical of explicit quotas feeling they may detract from their own efforts to find a place in the boardroom.
What about investing? Despite the vitality of the venture capital world there seems to be a dearth of female VCs. The same could be said for areas of investing as well. In an excerpt from my book published at FT Alphaville I talked about the limited number of female fund managers as a “market failure.” I wrote:
The numbers bear this out as well. Recent surveys show that women manage only 10% of mutual funds and only 3% of hedge funds. Some argue that the evidence points toward a prejudice against females in finance. No matter how you parse the data, this seems like a market failure. This disparity is all the more confounding when research shows that women generate returns that are equal to if not greater than what men achieve.
You need not assume that women are necessarily superior investors to consider a more diverse approach to investing. You need only recognize that women may think and act differently than male managers. Stephen Foley in the FT writes about how the statistical evidence is growing in favor of female hedge fund managers. This may be one reason why many large pension funds are explicitly targeting female managers. The other reason may be that female managers provide some measure of portfolio diversification as well. Foley quotes one female manager of a large hedge fund on this idea:
“Markets dominated by male investors are why ‘min vol’ strategies work so consistently,” she says, wryly. “Researchers have proven we think about risk and solve problems differently than men. I like my odds given a differentiated perspective in an industry that tends to have a very homogeneous group of participants.”
In addition to thinking differently it also is worthwhile thinking about the motivation of women who come to lead their own investment shop. Those women have likely experience explicit (and implicit) bias during their careers. To get to the point where they are in charge of a portfolio (or firm) shows a level of motivation that is not easily matched by male counterparts who did not have the same challenges.
Putting in place explicit rules to help combat any implicit biases we may have against female managers helps combat “bias blindness.” This can help lead to more diverse thinking (and investing). However don’t underestimate the importance of motivation as well.