Cognitive diversity can boost investment teams’ performance, but firms cannot just “add diversity and stir” to achieve improved results, a study by London Business School professor of finance, Alex Edmans, has argued.

The study, commissioned by the Diversity Project, focused on the range of perspectives, experiences, skill sets, and ways of thinking within investment teams, and how this influenced the quality of decision making.

Combining a review of academic literature with case studies from investment professionals, the report identified strong consistency between the two and that ‘virtually all' practitioners believed that cognitive diversity had the potential to create substantial value.

While cognitive diversity can create clear advantages for investment teams due to a greater range of perspectives and the mitigation of groupthink, it also comes with challenges, such as miscommunication and slower decision making, the study found.

To address these challenges, the report argued that sophisticated leadership was required to create an environment where dissent was encouraged but also an understanding was made on when to move forward and which views to prioritise.

In light of the findings, the Diversity Project identified six priorities help the investment industry realise the benefits and diminish the costs of cognitive diversity.

It encouraged firms to invest in managers and leaders, optimise hybrid working, broaden recruitment and keep a close eye on promotions.

Furthermore, firms were urged to organise diversity and inclusion efforts around problem solving, assess the quality of decision making, and reframe the debate to provide a nuanced analysis of the benefits and potential costs of diversity.

Building on the report’s findings, the Diversity Project will develop a framework for firms looking to harness the benefits of cognitive diversity.

“Before conducting this research, I thought that cognitive diversity was unambiguously beneficial – surely, diverse viewpoints lead to better decisions,” commented Edmans.

“But the scientific evidence and practitioner insights highlighted that it’s more complex. While cognitive diversity can indeed generate substantial benefits, it is also difficult to manage and must be supported by psychological safety and a culture of inclusion.

“These challenges only heighten its importance: since it is tricky to get right, any organisation that succeeds will enjoy a significant competitive advantage. I hope this report helps firms do exactly that.”

The Diversity Project chair, Baroness Helena Morrissey, added: “The Diversity Project commissioned this work to reassess the ‘business case’ for diversity. We made it clear at the outset that we wanted to see what the evidence showed, not work backwards from any conclusion we hoped to see.

“The conclusions are both intuitive and compelling: diversity must be developed thoughtfully and managed well to harness its powerful benefits.

“As the report highlights, great investment involves pursuing outlier ideas, so firms must create the right teams working in the right conditions for those ideas to surface.

“I hope this research will unify those on opposite sides of the DEI debate so we can all focus on delivering the best client outcomes.”

---