pop finance


bookjacketThe RSA Lecture by Brooke Harrington last Thursday was a great deal of fun. In a few weeks the RSA will put up a full video on their soon-to-be relaunched website, so when I see that I’ll publish the link.

As I mentioned before, Brooke’s work on diverse perspectives overlaps somewhat with that of Scott Page, and they have both sojourned at the Santa Fe Institute. It was about a year ago that Scott himself spoke at the RSA. As it will take me a while to get through the book, and I have one or two other books on the block to review for you, here are some quick takeaways from my notes.

Brooke said that prior to her research on investment clubs and their returns, dollar value of diversity in decision-making had not been adequately quantified, although it had been well-observed qualitatively.

Women, no matter what they did professionally, self-selected into choosing or advocating consumer stocks of the traditionally female domain. This gender appropriateness among even highly-qualified financial types was intriguing, and Brooke suggested it happens because we regress to comfort zones in this kind of decision-making, even as sophisticated adults.

Cocktail parties may have a significant influence on stock selection, Brooke says. She identified that in the late ’90s it was a requirement to discuss stock choices if one went out to parties, so choices would naturally be determined by what people considered socially acceptable. As she said, it would not be so nice to say you made a killing on tobacco stocks.

Social factors, rather than financial failure, were also the main reasons why clubs closed. Those that folded seemed to do so because of differences of opinion or frustration with free-riders, not because they lost money.

Identity is doubly important. People, even professional investors, buy stocks that they can identify with. So corporate identity is going to matter more, and there will be a further proliferation of identity funds: ethical, religious (Catholic, Lutheran, Sharia-based) etc.

Diverse perspectives are hard to achieve in organizations for cultural reasons. There can be huge conformity pressure that stops alternative information surfacing. Consequently, leadership is very important, the ability to tolerate and encourage dissonant voices being a quality generally lacking in many institutional frameworks.

Some more notes for all management, especially HR: diverse perspectives take a little longer to manage to fruition. There is too much emphasis in recruitment on bringing in staff who can hit the ground running, so a form of short-termism denies institutions the higher returns that diversity delivers. People also tend to preferentially associate, so boards can easily be dominated by “friends” of the CEO.

Different ethnic, religious and age backgrounds improve decision-making. And, as markets are complex systems, you need this diversity because each element brings more information, and you need as much information as possible when there is complexity.

Brooke was very gracious in conversation over coffee after the talk, for which I must thank her. She elaborated on one or two points, expressing a view that business schools in the US have tended to contribute to the process of emphasising corporate conformity. She also said it was necessary to examine the history of a company, its previous management etc to understand its culture, because, as Gerd Gigerenzer explains in Gut Feelings, the effect of those unwritten rules of previous executives can prevail long after they depart. “History is important,” she says.

The BBC interviewed Brooke here last week. The relevant section starts about 18 minutes in and gives more narrative on the phenomenon of investment clubs in the US.

[Editorial note: it seems appropriate, at this point, to add a diversity category to this blog as the categories themselves are nothing if not diverse.]

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