What Stock Market Decisions Can Teach You About the Pervasive Impact of Unconscious Bias

February 15, 2017

We’ve written a great deal about the impact that unconscious bias can have on important decisions. Biases that we are completely unaware of can push us to make sub-optimal choices. That means we may not only be unfairly treating those who are different from us, but also acting against our own self-interest. National Public Radio recently aired a report by NPR social science correspondent Shankar Vedantam titled “How Biases Affect Stock Analyst Predictions,” which underscores this point very nicely.

 

Few fields in the business world depend more on objective examination than analyzing companies and predicting their future financial performance. This field is unabashedly driven purely by numbers and making as much money as possible. That’s why Vedantam’s reporting is such a powerful example of the influence of unconscious bias.

 

The study he covers asked whether biases related to gender, political orientation and national origin, among other factors, influenced valuation of a company’s stock. “I was speaking with Alok Kumar,” says Vedantam. “He studies behavioral finance at the University of Miami. The hypothesis that he and his colleagues Sima Jannati, Alexandra Niessen-Ruenzi and Justin Wolfers wanted to explore is whether these biases shape the way analysts evaluate the performance and outlook of companies.” The study involved an analysis of 3000 stock analysts and 1700 CEOs and evaluated how the analysts reported on these companies between 1994 and 2012. Vedantam says the study revealed systemic ingroup bias — a more favorable impression of those who seem like you than those who do not.

 

According to Kumar, one of the authors of the study, male analysts predict higher earning estimates for firm headed by male CEOs. Overall, he says: “What we find is that because typically there are more male analysts in the market than female analysts, the consensus overall is higher for a male CEO than for a female CEO.”

 

Kumar says the same phenomenon is found in terms of foreign versus American business heads. Their research found that mutual funds managed by those who had “foreign-sound names” were funded less than other funds—about 10 percent less. 

 

“The stock market reacts more positively to any kind of news that we hear from these firms that are headed by either a female CEO or a CEO that has a foreign-sounding name or a CEO that contributes more to the Democratic Party,” Kumar says.

 

According to Vedantam, this unconscious bias tends to disproportionately negatively affect firms led by women, those with CEOs who have “foreign-sounding” names and those run by Democrats.  The bias can go both ways, of course, But, whether the ingroup bias Kumar and his colleagues uncovered is a positive or a negative to individual corporations, the implication for an industry betting billions on stock performance is certainly negative. Even a marginal miscalculation triggered by an unconscious bias is a big deal when that kind of money is at play.

 

If this type of bias is prevalent in situations where people are intentionally attempting to be unbiased, consider what level of unconscious bias may exist within your organization. Be inclusive!

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