The Business Case for Women Leaders

Have you ever noticed that the higher up you look in a company, the fewer women you find? The facts tell a bleak story: although women comprise 46 percent of the workforce [4], they hold only 4 percent of CEO titles and 15 percent of executive-level roles at Fortune 500 companies [4], 25 percent of corporate boards seats [8], and 24 percent of senior management roles worldwide [4].

Why do so few women reach the C-suite? Research suggests that implicit gender biases among hiring managers play a role [5]. Implicit gender biases, or stereotype-confirming thoughts, stem from perceived norms about men and women. Research shows that people are more likely to associate women with “communal” traits, such as kindness, sympathy, and helpfulness, and men with “agentic” traits, such as aggressiveness, decisiveness, and dominance [3]. Gender stereotypes portray women as lacking qualities that effective leaders possess – traits typically associated with men.

How can practitioners concerned about gender equity in the workforce persuade hiring managers to overcome implicit biases and hire more female leaders? We can start with behavioral science. By drawing on three psychological principles – loss aversion, framing, and confirmation bias – practitioners can communicate that hiring and promoting more women leaders can improve companies’ bottom lines.

The Business Case for Women Leaders

We know that diversity brings different viewpoints, backgrounds, and experiences to teams within organizations. But the benefits go beyond internal dynamics: numerous studies have shown that greater gender diversity in the workplace correlates to stronger company performance.

A meta-analysis of 117,630 organizations evaluated the link between women’s leadership and business performance [4]. Researchers analyzed various leadership roles within companies (CEOs, top management, and board members) and different measures of financial performance (return on investment and sales performance). The study found that women leaders, especially CEOs, positively correlated with company performance. Similarly, other research analyzed for-profit business performance data from the 1996-1997 National Organizations Survey [2]. Results showed that organizations with high gender diversity were more likely to have higher profitability, greater sales revenue, and more customers than organizations with low or medium gender diversity — even after controlling for variables like company size, organization age, industrial sector, and region.

Evidence also shows that having women on company boards correlates with higher firm performance. One study analyzed the performance of companies listed on the Australian Security Exchange 300 index (ASX300) [1]. The study was based on stakeholder theory, which holds that businesses are rooted within society and thus have some responsibility to do social good. Researchers analyzed how women’s communal traits, including concern for others’ welfare, affected female board members’ concern for stakeholders beyond its financial backers (i.e., shareholders). The study found women board representation to be indirectly correlated with stronger financial performance, because women were more likely to support pro-social activities like corporate social responsibility (CSR), which in turn directly correlate with stronger business performance.

How can practitioners use the evidence above in combination with behavioral science to reduce implicit gender biases among hiring managers?

Framing & Loss Aversion

The framing effect is one of the strongest cognitive biases in judgment and decision making [10]. Differences in wording or settings can highlight positive or negative aspects of a choice, leading to changes in perceptions about its attractiveness. Kahneman and Tversky’s famous 1979 study also demonstrated framing as it related to their earlier model of prospect theory, which showed that humans perceive losses as more significant than gains of equal value. In other words, humans are easily affected by loss aversion, such that losing $75 feels more negative than gaining $100 feels positive.

By framing the potential financial risk of not hiring more women leaders, practitioners can attempt to persuade hiring managers – especially executives who have a direct interest in firm financial performance – to hire and promote more women leaders. Take the following example: knowing that organizations that have 30 percent female executives earn up to 6 percent more in profits [9], practitioners can communicate the risk of losing $30 million for a company who earns $500 million in revenue per year.

Confirmation Bias

Confirmation bias is based on a cognitive heuristic – or mental shortcut – that gives more weight to evidence confirming our beliefs than to evidence opposing them. While we’d like to think our beliefs are always rooted in solid evidence, we may be more likely to avoid or dismiss differing viewpoints once we’ve formed an opinion.

Charles Lord and others’ classic 1979 study effectively illustrated the human tendency for biased reasoning [6]. Researchers investigated whether presenting confirming or disconfirming evidence on the death penalty changed participants’ strongly held views. The study showed that when presented with evidence against their views, their original beliefs became more firmly rooted. This attitude polarization became known as the biased assimilation effect.

Five years later, the researchers conducted a follow-up study that suggested it may be possible to counter confirmation bias by asking individuals to “consider the opposite” of their existing beliefs [7]. In two parallel experiments, participants again were presented with evidence confirming or disconfirming their beliefs about the death penalty. In the first experiment, participants were explicitly told to be “as objective and unbiased as possible in evaluating the studies” on the death penalty. In the second experiment, participants were given instructions to “ask yourself at each step whether you would have made the same high or low evaluations had exactly the same study produced results on the other side of the Issue” – the “consider the opposite” strategy.

The differences between the two groups were clear. When participants were explicitly instructed to be impartial and unbiased, they showed the same biases as in the original 1979 study. When participants were asked to “consider the opposite,” they reduced their confirmation bias and avoided favoring evidence that confirmed their existing beliefs. These findings suggest that, when given the right strategies, humans can overcome natural instincts to grasp evidence in line with current beliefs.

“Considering the opposite” during the hiring process may be a useful technique to overcome implicit bias. For instance, what if prior to interviewing candidates, hiring managers had to identify specific ways a diverse hire could benefit the company or team? Evidence suggests this strategy can help counter the confirmation biases that hiring managers often have about women’s leadership skills.


The AI Governance Challenge

Implicit gender biases aren’t the only reason there are so few women leaders. Family choices, career interests, and a host of other reasons likely all play a role. But for the women who want a fair shot at the corner office, it’s important to reduce implicit gender biases among hiring managers and make it clear that women leaders can benefit companies’ bottom lines. Then, maybe, we’ll get one step closer to gender equality in the workplace.

What Does Behavioral Science Have to Do With Transportation?

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Arlingtonian Ben Foster dropped by Mobility Lab this week and shared his perspective with a few dozen transportation experts on how behavioral science can help us better understand how we make decisions and how different types of information can affect the ways in which we might change our routines.

And as part of my company Conveyal’s work on the Arlington Transit Tech Initiative, it was a timely visit. We’ve been thinking a lot about how to help people better understand and incorporate different transportation options into daily routines.

But changing our routines can be challenging for both obvious and not-so-obvious reasons.

Foster spent the last several years in leadership roles at Opower, an Arlington-based company that helps individuals and businesses lower their energy consumption.

Similar to the choices people make with transportation, changing energy-consumption habits can be challenging even if the many benefits are clear. Through its work with utility companies, Opower has demonstrated how combining behavioral science and information design can motivate us to make and stick with new habits.

In the context of Arlington County’s work on transportation demand management, one of the more interesting concepts Foster discussed was BJ Fogg’s Behavior Model, which explores the effectiveness of “triggers” to motivate change.

Ultimately, it is a combination of personal motivation and circumstance that determine whether information, education, and outreach help people consider, say, taking the Metro instead of driving a car. But under the right conditions, triggers help us cross the threshold from intention to action. These triggers could include information tools (like apps, maps, or posters) or reminders about possible transit options (from friends, the media, or government agencies).

Chris Hamilton, bureau chief of Arlington County Commuter Services, attended Foster’s presentation and reacted: “It was so cool for our team to hear what Ben Foster learned at Opower and applied to using less energy. And discuss with him how that relates to trying to get people to drive less and bike, walk, and use transit more. Our B2B team at Arlington Transportation Partners and our outreach teams at Car-Free Diet, BikeArlington, WalkArlington, and The Commuter Stores were fascinated about figuring out what data could provide insight for people to take action and make a change.”


The AI Governance Challenge

These behavioral-science concepts have been utilized in other fields like finance and Opower’s own work on energy conservation. However, they remain under-explored in the world of transportation. Much of Transit Tech Initiative Phase 2 (read about Phase 1 here) will look for ways to connect these concepts to Arlington’s transportation programs.

We’re lucky to have a leader in the field like Ben Foster right here in Arlington. Hamilton noted, “We look forward to working with Ben and the Conveyal team on incorporating these principals into [Arlington County’s] education and outreach work.”

You can find out more about Opower’s application of these ideas in Foster’s TEDx talk on energy conservation.

What Can George Costanza Teach Us About Making Better Investment Choices?

My life is the complete opposite of everything I want to be – George Costanza

Investing is difficult. It’s a challenge to understand the nuances between asset classes, differentiate among sectors, and choose individual stocks. And, once a choice has been made, it’s easy to second guess our decisions, worry about missed opportunities, and wonder how to maximize returns. The human brain isn’t built to perfectly navigate the world of investing — much unlike homo economicus, the supposedly rational economic actor who can process all available information and always makes perfect decisions. Most humans rely on heuristics to simplify the information we process, and allow emotions to affect our decisions, which in the realm of investment can cause money to be lost and investment portfolios to suffer.

Luckily there are simple ways to navigate investment decisions that can help us outsmart our emotions, allowing us to outperform the market and keep more money in our pockets.

Understanding the Disposition Effect

Among the greatest impediments to our investment performance is the disposition effect, which dictates that the greatest factors influencing our investment decisions are often pride and regret, rather than profit and loss [1]. It refers to the tendency of investors to sell their winning assets too quickly, while holding on to their losing assets for too long.

For example, suppose I buy stock in two different companies, Apple and Microsoft. After a certain period of time, Apple’s share price may increase by 5% while Microsoft’s share price decreases 5%. At this point, many investors are prone to sell their shares in Apple. They may do this to realize and protect their financial gain [2] and to feel the satisfaction and pride of having made a winning investment decision [3]. On the other hand, if an investor were to sell their share of Microsoft, they would have to realize a financial loss (which many people are averse to realizing [2]), and feel the regret of having made a poor choice [3]. Thus, one holds on to their shares of Microsoft, while selling Apple. Such trading behavior is coined the disposition effect.

Is this wise? Most certainly not. Homo economicus doesn’t care whether his investments are winners or losers. From an investment point of view, there are only two things we should be concerned with: first, we care about the future prospects of the two companies and how the share price reflects those future prospects; second we care about minimizing our tax burden — so if everything else is equal, we would rather sell shares in Microsoft and hold onto shares of Apple.

By selling the loser, we can lock in a capital loss and use that capital loss to pay fewer taxes [5]. Homo economicus would, in fact, display trading behavior that is the opposite to the disposition effect. Humans, however, fall prey to its temptations. Studies [1, 6] have shown that investors are twice as likely to sell their winners (Apple) while holding onto their losers (Microsoft). Why do investors behave this way and what are the consequences of such behavior? Behavioral economics can shed some light on this manner.

Much of the literature on the disposition effect cites prospect theory [2] to explain such behavior. Prospect Theory suggests that when individuals are faced with decisions that involve judging probabilities and risk, we will often rely upon a reference point to determine whether a specific outcome is a gain or a loss. In turn, individuals (investors) evaluate losses and gains in very different ways. Specifically, losses loom larger than gains (this gap is estimated at roughly 2:1), and people are risk-seeking when evaluating losses but risk-averse when evaluating gains. For example, individuals will be more pained by a $10 loss than they are elated by the joy of a $10 gain. Individuals are also much more likely to gamble on a $10 loss than a $10 gain. Academics who apply prospect theory to investing [1][6] suppose that investors use the purchase price of a stock as a reference point. If the stock price goes up, it is considered a winner; if it goes down, it’s a loser. Given that losses loom larger than gains, and how this affects our preferences for risk, an investor will be much more likely to sell a winning investment while holding on to a losing asset.

Okay so this is nice information to know, but one might ask so what, what’s the big deal? Aren’t markets efficient [4]? At the end of the day does it really matter if I sell Apple and wait to make a decision on Microsoft? Let me just have some fun and realize my winners!

Well not so fast. Studies have shown that investors who are disposition prone [1][6] tend to underperform their peers [7][8] by as much as 4-6% a year.  Not only that, but by selling winners instead of losers investors do not take advantage of a vital component of the benefits of selling losers: paying less tax [5].

So what can we do to rid ourselves of our disposition behavior and keep more money in our pocket? George Constanza has some sage advice. George, in the last episode of season 5 of ‘Seinfeld’, reflects on his life and that says that ‘it’s just not working …I had so much promise … every instinct I have in every aspect of life … it’s all been wrong’. In reply, Jerry Seinfeld suggests that “if every instinct you have is wrong, then the opposite would have to be right”. Heeding this advice, George resolves to change his behavior, and do the opposite of what his instincts tell him to do. Later in the episode, George fights his shyness, introduces himself to a woman, and bit by bit his life starts changing for the better.


The AI Governance Challenge

What does this have to do with the disposition effect? The behavioral biases discussed earlier – reference dependence, loss aversion, seeking pride, and avoiding regret – lead us to consistently make inefficient decisions with respect to our investment portfolio. What should we do instead? The exact opposite! That is, hold on to your winners and sell your losers. This type of trading is also known as momentum investing [9]. Momentum investing has been shown to consistently generate above-average returns across different time horizons. Even better, by selling our losers we can lock in capital losses which can be used to pay fewer taxes. It’s a win-win, just like it was for George.

So the next time you’re looking at your portfolio and reflecting on which assets to buy or sell, you may be tempted to sell those winners, brag to your friends about them, and hope against hope that those losers rebound. Or you could think about George Constanza. He benefitted from doing the opposite, and so may you.