Research & Investment Strategy

Gender diversity: Why balance is better than history’s wild pendulum

Key points

  • Women make up almost half of the world’s working-age population, but they generate only 37% of global GDP. They are generally over-represented in low paying (or unpaid work as housewives), part-time, informal and low productivity jobs.
  • Whether looking at intelligence or emotion, cognition or behaviour, science has told us that men and women are fundamentally different and have a different risk-taking profile. Despite a clear understanding of the benefits of diversification, women are under-represented in the ranks of fund managers.
  • More recently, research suggested that gender behaviour differences may be driven by social identity rather than biology or genetics. As gender stereotypes become less stark, gender differences may be less persistent
  • Since the GFC, financial behaviour has been increasingly related to corporate risk culture rather than gender.
  • Prior to the crisis, the actual risk profile of organisations, meaning the balance between risk-taking and control, was often ignored.
  • Diversity must be understood in its broadest dimension: gender, on one hand side, but also age, culture, education and professional background.

Women’s status in society has fluctuated massively throughout history and across geographies, swinging from power to subjugation like a pendulum. In Ancient Egypt, women held equal financial rights with men. They were able to acquire, own and dispose of property, they had equal civil rights allowing them to sue or be sued and they could serve as witnesses and on juries. Similarly, during the medieval era, equality in family relations and the right to common property after marriage were recognised in many parts of the world. At other points in time and place, it disappeared or was significantly diminished. For centuries now, women in many parts of the world have suffered from discrimination and injustice of some kind. Admittedly, in what are now referred to as developed countries, increased rights were granted to women (after difficult fights) as they started to be economically active. As women entered the workforce and the working-class population grew very fast, the fight for equal rights began. Modern feminism was born, aiming first at the issue of women’s suffrage and then more broadly at overturning inequalities and cultural gender norms. Yet, in certain parts of the world, particularly in some developing countries, women remain oppressed as we write; they may not be granted access to education or information, they may not be allowed to own property. Sometimes they cannot access paid work and they may still be constrained in many aspects of their personal lives.

As a reminder, in the developed world and not that long ago, women did not have equal inheritance rights – Iceland was the first to institute unconditional equal inheritance in 1850, the UK Law of Property Act granted it in 1922. Women only got the right to vote after the First and in some cases the Second World War (despite the fact that they were allowed to vote in Middle Ages) let alone the right to be eligible to hold office, while others had to wait a lot longer. Swiss women, for example, have only be able to vote and hold office at a federal level since 1971. For very long, they were not allowed to work without their husbands’ consent. In France this has only been legally possible since 1965. Similarly, women could not open a bank account on their own (possible in France since 1886, in the US since the 1960s and since 1975 in the UK). They could not apply for a loan without a male guarantor (granted in the US in 1974), nor were they admitted to the Stock Exchange (the first woman set foot in the London Stock Exchange in 1973; the first woman President of the New York Stock Exchange was appointed last year).

The economics of women empowerment

Various social protest movements during the 1970s brought about the emergence of the empowerment concept in social sciences, directed at first to marginalised or oppressed groups of people (including women), encouraging them to express themselves and eventually overcome the domination that they were facing. Feminists embraced empowerment as a cause and the number of publications on empowerment, gender and development exploded throughout the 1990s echoing eventually in the institutionalised discourse of the United Nations (UN) when, at a conference in Cairo in 1994 it gave the concept international visibility. A year later, the UN adopted an agenda for the “empowerment of women”, as fundamental for achieving “equality, development and peace”.

Women empowerment remains a relatively vague concept, and the lack of a precise definition has made its goals equally unclear. In macroeconomics, the concept of women empowerment has been translated into policies aimed at increasing female contribution to economic growth.

Women make up a bit less than half of the world’s working-age population, but when it comes to economic activity, their contribution is well below potential, generating only 37% of global GDP[1]. Significant progress has been registered globally during the past century: in the early 1900s, female labour participation hovered between 20% and 40% in the major developed countries, the current global labour force participation rate for women is below 50% (48.5% in 2018 according to World Bank Database), versus 75% for men (Exhibit 1). These global figures mask tremendous regional disparities, with the lowest participation rates for women sometimes below 30% in some countries in the Middle East, Northern Africa or Southern Asia. The relationship between female participation rates and GDP per capita follows a U-shape, meaning that female labour participation rates are highest in the poorest and richest countries alike, and lowest in countries with average national incomes. Additionally, women are over-represented in low paying (especially agriculture), part-time, informal and low productivity jobs. According to the World Bank, there is a significant gender gap in earnings and wages for the same industry and occupation: women earn, on average, 10-30% less than men. These figures, are, however, very disparate across different countries.

When thinking about women’s contribution to economic activity, one arguably omits the services of housewives which are unpaid (and women do the majority of this unpaid work). The daily chores of cleaning, cooking or raising children have always been ignored by national accounts. Even though the statistical measurement of the Gross Domestic Product (GDP) integrates some non-market activities (such as NGOs, public services), it does not include unpaid work, whether at home as housewives or outside the household as volunteering. The Bureau of Economic Analysis estimated that home production would have added 26% to the United States GDP in 2010, while an OECD study (2011) showed it would add 20-50% to GDP for its member countries. An important issue about not integrating these aspects in the national accounting is that economic policy may tend to overlook them and that society itself may annul their importance and diminish the value they add.

Gender diversity in asset management – the timeline of the scientific research

Whether looking at intelligence or emotion, cognition or behaviour, science has told us that men and women are fundamentally different. In “The Descent of Man and Selection in Relation to Sex” published in 1871, Charles Darwin argued that evolution made the man “superior” to the woman, a superiority largely played out in the intellectual and artistic realm. For decades, scientists claimed to find evidence to support this. Yet, an increase in women’s access to education has silenced many of these ideas. According to US Census data, in 1940, 5% of the US population obtained a bachelor’s degree: 5.5% of men for only 3.8% of women, meaning that in order to match men’s performance, 45% more women had to obtain the degree. 75 years later, in 2015, 30% of the US population had a university degree and for the first time, more women than men had bachelor’s degrees.

However, there are significantly fewer women managing funds than women in jobs with similar high education requirements such as lawyers or doctors (30-50%). According to a 2015 Morningstar survey of more than 26,000 funds in 56 countries only one in five fund managers is a woman, this figure is lower in countries with large financial centres (the US, Germany, Brazil, India). And this despite multiple surveys suggesting outstanding performance of women-led funds. For example, KPMG’s 2015 Women in Alternative Investments Report shows that women-managed hedge funds have outperformed both the HFRI and HFRX composite indices of HF performance nearly every year since the launch of the diversity HFRI Women index in 2007 (Exhibit 2).

Gender difference about risk taking

This brings us to the concept of “gender”. While the biological differences between men and women have been well researched, the social definition of “gender” and the societal differences this conveys in terms of assumed roles and attributes for males and females has been less well covered. Part of the reason for this is that these social definitions of what it means to be a woman or a man vary significantly among cultures and change over time. That said, gender research in biology, psychology and anthropology has tried to support and, in some cases, to shake up those cultural setups. 

Certain researchers suggested that there are fundamental differences in cognition between sexes (Sapienza, 2009), while others examined psychological differences (Charness, 2011) or social factors that may explain the different behaviour (Byrnes, 1999).A consistent finding in the literature on risk preferences has been that men take more risks than women, whether it be as a result of different emotions, overconfidence, or different risk perception (challenge versus threat). In what has since become a classical reference in the field, Byrnes, Miller, and Schafer (1999) provided a meta-analysis of 150 studies in which the risk-taking tendencies of male and female participants were compared. Males appeared to take more risks even when it was clear that it was a bad idea to take a risk while women are disinclined to take risks even in fairly innocuous situations or even when it was a good idea to take a risk (e.g. intellectual risk taking on practice SATs). This suggested that men tend to encounter failure more often than they should whereas women tend to experience success less often than they should.

Scientists looked for possible biological roots for those differences. The androgen hormone of testosterone came into the spotlight. Aside from being the hormone that makes men men, testosterone has linked to specific behaviours, such as aggression (Archer, 2006), sensation seeking (Roberti, 2004), and dominance (Mazur, 1998). Additionally, exposure to pre-natal testosterone has been shown to affect risk attitude (Xie, 2017). Social risk taking, however, (i.e. openly expressing disagreement in personal or professional environments, moving to a different city, wearing unconventional clothes) is the only category in which genders appeared not to differ (Harris, 2006). It is also worth noting that most of these studies analyse risk attitude through a particularly masculine lens, focusing on gambling or skydiving. When this research bias is addressed, women and men appear equally likely to take risks (Morgenroth, 2017).

Looking more specifically into gender differences in financial behaviour, researchers showed that male investors more are likely to perceive themselves as competent than are female investors (Graham, 2009), are more confident (Grinblatt, 2009) and trade more often than women (Barber, 2001). Experiments on all-male run markets tended to yield price bubbles while all-female run markets produced prices below 

fundamental value (Eckel, 2015), likely because men are more competitive (Niederle, 2007) and more selfish (Rand, 2016). Testosterone could lead to the irrational exuberance observed during market bubbles (Coates, 2010) as the hormone is also associated with more optimism. Men thus exhibit greater optimism and overestimation of small probabilities of success relative to women (Xie, 2017). Physiologically, different activity in the insula and dorsal striatum, the regions of the brain involved in computing risk and preparing to take action (Mather, 2012), could explain the differences in risk taking under stress evident between the two genders.

These differences in behaviour may however be the result of social identity rather than biology or genetics (Zetterdhal, 2015). Social identity is a cultural product that “imposes” overconfidence in men (see table) and researchers showed that as gender stereotypes (Exhibit 3) become less stark, the effects of identity on (financial) behaviour fade, meaning that those well researched gender differences may be less persistent (d’Acunto, 2015).

At the time of the global financial crisis in 2008, Christine Lagarde, managing director of the International Monetary Fund, said that “if it had been Lehman Sisters rather than Lehman Brothers, the world might well look a lot different today” hinting at the male domination of the banking industry. Indeed, excessive and uncontrolled risk taking was at the heart of the crisis as financial institutions and

regulators misunderstood risk-taking behaviour. Yet, it is probably not a gender-related issue. Lehman Brothers had had one female board member since 1996, and its CFO was Ms. Erin Callan. Beyond Lehman Brothers, we can recall JPMorgan’s head of Global Derivatives Group, Ms. Blythe Masters, who was present at the creation of the credit default swap, an instrument that played a major role in the GFC. Financial behaviour has been increasingly related to corporate risk culture.

Prior to the crisis, the actual risk profile of organisations, meaning the balance between risk-taking and control, was often ignored. Risk management within financial organisations came at the forefront of the risk culture debate, implying significant time and resource investments. In parallel, corporate narratives that highlight the importance of having a strong client focus along with respect for newly implemented internal control processes have gained ground. Companies have also increasingly introduced specific risk metrics within the performance management system aiming at modifying employees’ behaviour. Regulation has undoubtedly helped to accelerate the risk culture change.

Asset management diversity: valuing differences rather than similarities?

In recent history, women’s access to hierarchically higher positions in society has generally been a function of how well they were able to prove that they were like men. However, it is important to note that similar does not necessarily mean equal, nor does different mean unequal either. From equality or inequality, the discussion has now shifted to the importance of gender diversity. Research by BCG about the benefits of gender diversity found that companies with workforces and leadership teams that are more balanced between men and women are more creative, more innovative, and more resilient, while the women employees at these companies have higher levels of engagement.

Complementarity between the sexes appears to have become the new credo. Increasingly, we hear about the importance of having greater representation of women in leadership positions, such as more women on corporate boards. More and more companies are introducing gender diversity initiatives or targets. It may be the beginning of a new journey. In 2016, according to a McKinsey report, Western European listed companies have a mere 17% of women executive committee members, with women board representation at 32% (for the US, these figures are even lower, 17% and 19% respectively).

Importantly, diversity must be understood and promoted in all its forms: gender, on one hand side, but also age, culture, education and professional background. These are just some of the many aspects that can provide corporates with a rich workforce more likely to provide them the economic outperformance they are aiming for.

[1] McKinsey Global Institute report, September 2015

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