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Bias in the Financial Services Industry

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October 10, 2017

In early 2017, Stanford SPARQ: Social Psychological Answers to Real-world Questions and Illumen Capital, a financial firm focused on investments with both positive impact and strong financial returns, began a research project to examine the lack of gender and racial diversity in the financial services industry. A first research aim is to document and potentially reduce implicit biases that likely contribute to gender and racial disparities in investing.

The problem is acute. On the one hand, people of color make up 23.1 percent of the U.S. population, and women comprise 50.8 percent of Americans. Yet on the other hand, people of color own just 3.7 percent of all private equity firms and manage only 3.4 percent of the industry's assets, according to a report from Harvard Business School and Bella Research. The same report notes that women own only 1.9 percent of private equity firms and manage about 1.5 percent of the industry's assets. These disparities persist, despite diverse firms performing as well as their more homogenous counterparts. Racial and gender disparities also appear in other asset classes, such as hedge funds and mutual funds.

Daryn Dodson, founder and managing director of Illumen Capital, initiated the research project. An alumnus of the Stanford Graduate School of Business and a member of the school's Management Board, Dodson observed investors passing up many promising opportunities to invest in women and people of color. Yet many of these investors did not seem to harbor conscious prejudices or even notice their biased behavior.

After reading the research of SPARQ directors Jennifer Eberhardt and Hazel Markus, Dodson asked: Is unconscious bias driving these disparities? And if so, what would it take to change investors’ behavior? The resulting project aims not only to improve investors’ portfolios, but also to promote fairness across the financial services industry.

Photo credit: Joe Goldberg/Flickr | CC BY 2.0