Originally published: June 15, 2020
When my youngest daughter was quite little, she asked if we could play a game of doctor with her dolls. I quickly agreed and handed her the toy stethoscope. She immediately frowned and returned the instrument. “Boys are the doctors,” she explained, as she picked up the nurse’s hat.
I was shocked. I had never thought of myself as a sexist parent, but I quickly realized that every doctor she had seen was male. Every nurse was female. That was the only world she knew!
Fast forward to the late 1990’s and the medical school where I taught decided to increase the number of underrepresented medical students: African-American, Hispanic, rural, female, and international. Invitations went out to colleges and we held open house events. Attendance was disappointing until the administration started a new internship program. College students from those underrepresented groups spent a summer internship shadowing physicians to see what medicine was all about. During the internship, every student had to wear a lab coat, and every student was referred to with Dr. in front of their last name. That worked! Once students had a taste of being a doctor, they could wrap their heads around becoming doctors. Like my daughter, most of them had never seen a physician like themselves.
Now fast forward a decade, as I began my career as a psychologist working with traders and investors at investment banks, hedge funds, proprietary trading houses, and asset management firms. I quickly learned that there were few females on the trading floors and even fewer money managers of color. When I became involved in recruitment at these firms, I discovered that there were very, very few applicants from underrepresented groups. It dawned on me that these young people had never had a family member, neighbor, or role model who managed financial capital. Like my daughter, like the undergraduates encouraged to think of medicine, they never envisioned themselves in financial careers and thus struggled to make the leap.
Sad to say, things have not changed greatly in recent years. Women hold very few roles in finance, especially leadership roles. According to Oliver Wyman, the percentage of women in leadership roles in finance has doubled since 2003, but the current level is still in the low 20% range. Among the financial firms where I have worked, it is not uncommon to find few if any women on trading floors. Interestingly, research suggests that role models matter to women: when a daughter has a mother who works in a science, technology, engineering, or mathematical (STEM) field, she is 48% more likely to work in finance than a son in the same situation. The chicken-and-egg problem is clear: women are less likely to pursue careers in financial markets if they don’t perceive role models, and the field cannot generate role models without growing a base of women professionals.
Similar challenges lead to a lack of racial diversity on trading floors and broadly across financial firms. Among financial advisors, for example, only 3.5% are African-American or Latino. Janice Gassam, reviewing data from the largest money center banks, reports that boards of directors and corporate leadership are dominantly white and male, with diversity metrics typically not tied to compensation. A report from The U.S. House Committee on Financial Services finds that the proportion of employees of color at top U.S. banks matches the percentage in the overall population, but that most of these employees are entry-level and not part of senior management. William D. Cohan notes progress in the hiring of diverse talent on Wall Street and also observes that there is a long way to go. For example, he reports that the percentage of black talent at senior levels of management at top institutions is in the low single digits. Among the money management firms where I have worked, the percentage of African-American and Latino traders and investors has been in low single digits.
So does all this matter?
The U.S. House Committee on Financial Services report on diversity and inclusion in finance summarizes studies that find:
We know from research that women and men differ in their cognitive functions and strengths, reflecting differences in brain structure and function. These brain differences impact performance in learning environments, with distinct areas of strength and vulnerability. We also know that improved workplace diversity is associated with improved company performance, greater employee retention, and higher employee engagement. Might this be the case in finance as well?
At the medical school where I was involved in the recruitment of underrepresented student groups, we found that there were distinctive differences of learning strengths among male, female, and racial/ethnic minority students. Male students were most likely to study individually from notes and books; female students were more likely to collaborate in sharing notes; and minority students tended to study actively and interactively in groups. When it came time to work with patients on the various clinical services, these different learning styles brought synergies to the teams, improving treatment planning and reviews.
Similarly, I find that portfolio management teams outperform their peers when the members bring unique backgrounds and perspectives. It is in the combining of these diverse perspectives that “alpha”—unique economic returns—can be generated. Conversely, without differences of view and background, there is a tendency for teams to become stuck in consensus thinking and mediocre outcomes. For example, in successful teams, it is not unusual to find members from different national backgrounds and different specializations in strategies (quantitative vs. discretionary); asset classes (equities, fixed income, currencies); and regions (emerging vs. developed markets). Might we similarly find differences in money management style among women, men, and various ethic and racial groups? Might these differences contribute to improved team performance, as in medicine?
A striking example of strength-in-diversity comes from Maria Konnikova, who broke into the male-dominated world of competitive poker through the help of intensive mentoring and a unique background in psychology. As she explains in her recent book, it wasn’t the desire to make money that brought her to professional gambling, but rather the passion to learn about the role of luck and decision making in life. It was precisely the uniqueness of her background that brought her to the top of the competitive arena.
A similar focus on talent development comes from 100 Women In Finance, which has built a network of mentors and funding sources to help women break into the world of money management. The creation of career pipelines and ongoing efforts at education help women move beyond entry level positions to achieve roles of leadership. Troy Prince, together with Maverick Trading, has developed a program to bring under-served young adults into the financial world through a structured training program. The Wall Street Bound program is designed to identify and mentor talent through the impact of minority role models. The Greenwood Project, operating in the Chicago area, introduces hundreds of minority students to the financial industry each year across dozens of firms. The Project includes a Women of Wall Street group, as well as a summer internship program to introduce students to finance. Those efforts have attracted the participation and donations of a number of financial institutions, including the Fintech In Action initiative.
It appears that these efforts to broaden finance have taken root at some of the largest financial institutions, as Karen Gilchrist recently observed in a CNBC article. Working from home has encouraged employers to create virtual internships, which reach many students. Gilchrist notes that this trend is helping to diversify employment in finance at such firms as Deutsche Bank and Goldman Sachs create work experiences in different cultures and expand their hiring among Black, Latino, and women students.
These efforts demonstrate that inclusion in finance is more than a politically correct nicety. Diversity is associated with superior performance precisely because it has the potential to bring diverse strengths to the management of capital. Nobel Prize winner Harry Markowitz once described diversification as the only free lunch in investing. Combining positive, independent income streams creates smoother equity curves and better risk-adjusted returns. The same appears to be true in the financial workplace.