Bubbles, riots, and mass hysteria aside, "the crowd" can sometimes be very smart. Studies show that groups make far more intelligent decisions collectively than individual experts do alone.
However, amassing a group of smart people to tackle a vexing problem isn't enough. The most effective groups contain one particular type of person who makes that crowd much smarter. According to fascinating findings recently revealed by Harvard Business Review, the distinguishing factor lies not in IQ, but in gender: Groups incorporating women make better decisions.
Where the Crowd Can Go Wrong
James Surowiecki's 2004 book The Wisdom of Crowds asserted that groups can out-think the experts, making better predictions and decisions than individuals can. But in the years since, decisions made by crowds admittedly haven't worked out too well. Lockstep groupthink marched us right into the housing bubble and the financial crisis, leaving theories like Surowiecki's a bit harder to swallow.
But perhaps the relative absence of women among those groups of decision-makers contributed to those mass decisions' awful outcomes. The financial-services industry is notoriously male-dominated, rife with egomaniacal behavior and dominated by a short-sighted penchant for pursuing short-term gain. In that light, I'm not surprised that Wall Street took the dangerous road it did -- and never even bothered to stop and ask for directions along the way.
How Women Win
Research shows that females tend to exhibit greater patience and take fewer risks. In short, estrogen and long-term thinking seem to go hand-in-hand. These traits can help build high-quality businesses, warding off major crises and failures. And findings cited by a study in the Harvard Business Review suggest that when these qualities help to shape any group decision, that group's choices get a whole lot smarter.
The study assembled individuals aged 18 to 60 into random groups, then gave them intelligence tests that included brainstorming, decision-making, and visual puzzles, with the end goal of solving one complex problem.
The tests revealed that "social sensitivity," a frequently female tendency, helped groups move beyond their individual IQs to actually listen to one another. The resulting open minds and constructive criticism helped build better decisions. According to one of the study's authors, Professor Anita Woolley, "[W]e saw pretty clearly that groups that had smart people dominating the conversation were not very intelligent groups."
Theories about collective intelligence do suggest that diversity gives the smartest groups their superior savvy. Including more women in those groups provides one good way to foster such cognitive diversity.
Where It All Goes Wrong
Women now hold more positions of power in business and other areas of life. Female CEOs head up PepsiCo (PEP), Kraft Foods (KFT), and Avon (AVP), for example.
Still, American business still often overlooks or or undervalues female participation and performance. Gender discrimination allegations against huge companies like Goldman Sachs (GS) and Walmart (WMT) shock no one.
Women hold a paltry 12% of board seats at major U.S. companies, even though a 2010 McKinsey study revealed that companies with more females on their boards outperformed other companies on operating results and other important metrics. Women led only 12 Fortune 500 companies at the beginning of 2011 -- down from 15 the year before.
In investing, Bloomberg and the National Council for Research on Women revealed last year that from 2000 to mid-2009, women-run hedge funds' performance averaged 9% annually, versus less than 6% among funds run by men.
According to the study, "On average, women tend to be more consistent investors, holding investments longer and processing a greater level of informational detail, including contradictory data, in making decisions."
In short, ditch the ego, gentlemen. Organizations and groups that fail to accept females are simply holding themselves back.
The High Price of Low Female Participation
It's high time we recognized that men and women each have their own sets of strengths, both of which can contribute to successful decisions in business and investing. In the long run, those who fail to recognize women's crucial role in making groups wicked smart may end up paying a very high price.
The Motley Fool owns shares of Wal-Mart and PepsiCo. Motley Fool newsletter services have recommended buying shares and creating diagonal call positions on PepsiCo and Walmart.
Alyce Lomax does not own shares of any of the companies mentioned. For more on this and other topics, check back at Fool.com, or follow her on Twitter: @AlyceLomax. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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