Tools & Resources

Race influences professional investors’ financial judgments

Significance

We find evidence of racial bias in the investment decisions of asset allocators, who manage money for governments, universities, charities, foundations, and companies. This bias could contribute to stark racial disparities in institutional investing. In general, asset allocators have trouble gauging the competence of racially diverse teams. At stronger performance levels, asset allocators rate White-led funds more favorably than they do Black-led funds. At weaker performance levels, asset allocators actually prefer Black-led teams to White-led teams. However, asset allocators are unlikely to invest in weaker funds, diverse or otherwise. These results suggest that beyond racial disparities in the pipeline, there are additional systemic racial disparities in how investors evaluate funds and allocate money.
 

Abstract

Of the $69.1 trillion global financial assets under management across mutual funds, hedge funds, real estate, and private equity, fewer than 1.3% are managed by women and people of color. Why is this powerful, elite industry so racially homogenous? We conducted an online experiment with actual asset allocators to determine whether there are biases in their evaluations of funds led by people of color, and, if so, how these biases manifest. We asked asset allocators to rate venture capital funds based on their evaluation of a 1-page summary of the fund’s performance history, in which we manipulated the race of the managing partner (White or Black) and the strength of the fund’s credentials (stronger or weaker). Asset allocators favored the White-led, racially homogenous team when credentials were stronger, but the Black-led, racially diverse team when credentials were weaker. Moreover, asset allocators’ judgments of the team’s competence were more strongly correlated with predictions about future performance (e.g., money raised) for racially homogenous teams than for racially diverse teams. Despite the apparent preference for racially diverse teams at weaker performance levels, asset allocators did not express a high likelihood of investing in these teams. These results suggest first that underrepresentation of people of color in the realm of investing is not only a pipeline problem, and second, that funds led by people of color might paradoxically face the most barriers to advancement after they have established themselves as strong performers.
 

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