Diversity is the ultimate diversification strategy



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Nowadays the benefits of diversification as a business or financial strategy are acknowledged by most players. In this post, I will argue that the ultimate frontier for diversification is to be intrinsically diversified, as nature does it, by building teams as dynamic populations of diverse individuals. Diversity is not only fair and good for karma, it also adds value to your organization. It’s in your best interest to make the effort. Let me convince you.

Nature solved the diversification problem before

Evolution is the process by which life adapts to previously unseen and changing environments. It’s commonly described as the survival of the fittest, evoking some sort of tough competition among individuals of the same species. In the collective imagination, the strongest wins the epic battle for the resources. Reality is somehow less epic and definitely much more interesting.

Working on animal evolution for years gave me a deep vision on the phenomenon. To clarify how evolution works and how it can be a useful inspiration for a financial or business strategy let’s bust some myths on the topic.

First, evolution is a population effect; a single individual does not evolve. That means that for evolution to occur you need a group of individuals. Second, evolution means change; species do not evolve at some point and survive forever. Evolution is a process, not a state or a goal. And third, evolution requires diversity. One of the major actors of evolution, natural selection, only works on diversified species. If all the individuals are clones, when there is a change in the environment they all either die (so the species disappear) or survive another day (if they are lucky enough). There is no selection possible when there is nothing to select from.

Therefore species require a dynamic population of diverse individuals to be able to evolve and increase their chances of survival in changing and unpredictable environments.

Diversity in the financial workplace

To make clear how the financial industry can benefit from these concepts, let’s do a couple of thought experiments.

The first is very straight forward. Imagine that you want to build an investment portfolio. As many of you are aware, it’s standard to diversify the portfolio in order to reduce risk. Let’s analyse these words in detail. In this case it’s easy to match each asset in our portfolio with an individual of a species. We want our assets to be literally diverse. We typically measure diversity through correlations, so we know different assets behave differently in different situations.

In this case, the concept of survival is encapsulated in the word risk. We can draw the parallelism between surviving and increasing the value of your portfolio. Therefore, we would be benefiting from the concept of diversification from an evolutionary point of view: diverse individuals (assets) that reduce risk (probability of your portfolio to lose value). It should be easy now to realise that the same idea holds true when a business diversifies its strategy with new products in new markets. In this case, the business becomes less vulnerable to a single catastrophic event within a given market, because some of the products will, as evolution teaches us, survive.

The second experiment is less common, but still very straight forward. Imagine we want our company or organization to be successful to survive another day, like a species. Companies and organizations are complex creatures, but overall they are groups of people that need to address challenges. For a company to survive it needs to be able to address the predictable and unpredictable challenges correctly. People within organizations are responsible for solving those challenges. If they are all just clones, when there’s a new threat to address, no team member will be able to solve it… Or all of them will solve it the same way (if they are lucky enough). Therefore, to survive as an organization we need to have a diversified group of individuals to increase our chances to address any kind of unseen challenge.

And how?

Diversifying portfolios is already commonly used so I don’t feel like I need to convince the community to spend resources on it. It is so well established that it even lead to Nobel Prize in Economics to Harry Max Markowitz in 1990.

Then, I will focus on how to achieve diversification within organizations. A relatively established way of diversifying your organization is through multidisciplinary teams. In this case, the diversification is obtained through individuals with different skills that can build different solutions. This may fulfill part of your diversification needs; however, it could be the case that your team is multidisciplinary, but it is not diverse, so they won’t be able to address different challenges. They will build different versions of the same solution to a given challenge and still fail to deliver at other challenges.

The truly diversified team is composed of individuals with different life experiences, with truly diverse points of view that can face all the possible challenges that you may or may not imagine.

The truly diverse team is a dynamic population of diverse individuals. Diverse teams combine social and economic backgrounds, sexual orientations, genders, races, religions, ethnicities, height, weight… that evolve through communication and synergies.

Recent experiences confirm that hiring diversity requires an effort, as the Duolingo case. However, diversity is the only way to be ready for the unpredictable.

Just like nature taught us.

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