The Performance of Diverse Teams: Evidence from U.S. Mutual Funds

Abstract

We examine team diversity and performance using the asset management industry as a laboratory. Employing political aliation as a proxy, we nd ideologically diverse teams perform better than homogeneous teams. The mechanism involves both improved decision-making due to more diverse perspectives and increased monitoring by heterogeneous team members. The benets of ideological diversity reverse when political polarization is higher, consistent with increased intra-team con ict, and decreased ability to reach consensus. In examining why less diverse teams are prevalent in asset management, we nd entrenched managers prefer homogeneous teams and the local labor market supply of ideologically diverse managers is constrained.