Implicit Bias: What It Is and How It Can Impact Your Investment Decisions

What Is Implicit Bias?

Implicit bias typically refers to negative attitudes or stereotypes about individual people or a social group. A key distinction between implicit bias and explicit bias is that the former is a type of bias that the holder is unaware of. The interaction of personal experience, learned associations with different social groups, and various prejudices or preferences all inform and create implicit biases.

An individual may form implicit biases based on factors including age, race, gender, sexual orientation, socioeconomic status, and many other categories. In finance and investing, these types of biases may lead an investor to choose one company to invest in over another, to overlook the merits of a business or potential partner, or to overvalue the work of a subconsciously preferred group, for example.

Implicit Bias vs. Explicit Bias

Implicit bias is a form of subconscious bias. It is distinct from explicit bias, which is often the way that we traditionally think of bias. In the case of explicit bias, an individual is aware of their attitudes toward particular groups, and they hold conscious positive or negative feelings about those groups. Explicit bias may take the form of overtly racist or sexist comments, for instance.

On the other hand, implicit bias is subconscious. It produces an automatic negative or positive feeling for a particular group. This type of bias is particularly sensitive to preexisting stereotypes—implicit bias only requires knowledge of those stereotypes to yield actions that are discriminatory.

Types of Implicit Bias

Implicit bias can take a wide variety of forms. Here are some of the most common categories of implicit bias.

Age

Ageism is a type of implicit bias that includes conscious or subconscious stereotypes or prejudices based on someone’s age. For example, an older worker may hold implicit biases about a younger colleague’s work ethic, while the younger worker may have subconscious biases about their older colleague’s abilities to use technology in their work.

Race

The concept of prejudice based on race can take the form of both implicit and explicit bias. Implicit racial bias is different from explicit racism and discrimination because it is subconscious and not always obvious. The ways that individuals affected by implicit racial bias act may be discriminatory without their even knowing it. For example, the U.S. criminal justice system has been well-documented for instances of implicit as well as explicit racial bias.

Gender

Implicit bias based on gender can be found in many workplaces, academia, government, and more. This type of bias can manifest as an assumption that women may not have an aptitude for science- or math-based fields, or that men are more assertive in the workplace, among other things.

Socioeconomic Status

One aspect of a person’s identity that may be subject to implicit bias is their socioeconomic status. Studies have shown that individuals with lower socioeconomic status face higher mortality rates when accounting for certain other factors. Doctors may treat these individuals differently from those with a perceived higher socioeconomic status, in part as a result of implicit bias.

Other Factors

Implicit bias can center on a number of other aspects of identity as well, some of them linked to the types of implicit bias listed above. An individual’s name or address listed on a resume can make them a target of subconscious bias, as researchers believe that human resources teams may subconsciously decide against women and people of color in some cases. Implicit bias may even focus on factors like an individual’s physical appearance or weight.

Implicit Bias in Finance and Investing

Implicit bias is also found in finance and investing. In these cases, bias may affect not only potential business partners but also entire companies or industries. Implicit bias in the investing world may mean that an investor subconsciously makes impaired choices about how to allocate their assets.

Investors of all levels are subject to their emotions and underlying biases. In this way, implicit bias in finance and investing falls under the broader field of behavioral finance—the study of how psychological factors impact an investor’s decisions.

In addition, researchers at Stanford University recently found that venture capital firms led by people of color faced increasing levels of bias when they performed better. Conversely, this means that some investors may also overvalue firms led by White, male teams, consequently missing opportunities for higher returns as a result of implicit bias. About 90% of venture capital funding in Silicon Valley is allocated toward teams led by White men.

As the above demonstrates, and as a multitude of studies have confirmed, the impact of implicit bias is real and measurable. One result of implicit bias in the financial world is that women or investees and communities of color are less likely to receive capital support, potentially perpetuating the plight of underserved communities.

Implicit bias also has complex repercussions: A 2019 study published by the Proceedings of the National Academy of Sciences (PNAS) asked asset allocators to rate venture capital teams from among one group of teams that generally had stronger credentials and one group of teams that had weaker credentials. The study found that asset allocators rated White-led, racially homogenous venture capital teams higher when comparing groups of teams with stronger credentials, but rated Black-led, racially diverse teams higher when group credentials were weaker.

Further, allocators’ judgments of team competence were more strongly correlated with expectations of future performance for the racially homogenous than racially diverse teams.

Avoiding implicit bias in finance and investing requires active training and awareness. The Mission Investors Exchange recommends that all asset managers and other investment fund staff undergo implicit bias training so that they are better able to identify these biases and adapt their behaviors.

How to Avoid Implicit Bias

Implicit Association Test

The Implicit Association Test (IAT), sometimes known as the implicit bias test, is a well-known exam designed to help people identify their subconscious biases. Because one of the essential steps toward avoiding implicit bias is to determine what those biases are, this test has the potential to be a helpful part of that process. However, the test has a low stability, meaning that if the same person takes the same test on multiple occasions, they may receive very different results. Further, the correlation between IAT results and discriminatory behavior may be small.

The IAT was created as part of a project, by a team led by Dr. Anthony Greenwald, Dr. Mahzarin Banaji, and Dr. Brian Nosek in the 1990s. The test consists of a series of words or images on a computer screen, and participants categorize them as they appear by pressing certain keys on a keyboard. The IAT measures the time that it takes participants to respond to multiple stimuli, in an attempt to make sense of the mental associations that those participants have. The IAT may be used to measure implicit bias involving race, gender, age, weight, political views, and more.

Project Implicit continues to operate as a nonprofit organization aiming “to educate the public about bias and to provide a ‘virtual laboratory’ for collecting data on the internet.”

It’s important to keep in mind that the IAT is designed to predict average outcomes across larger groups, and it is more flawed as a measure of an individual’s bias and potential behavior. Still, a flawed measurement like the IAT may still provide useful information on a larger scale—for counties, cities, or states, for example.

Mindfulness, Perspective Taking

Other strategies to help identify and eliminate implicit biases include mindfulness and perspective-taking exercises designed to inspire self-reflection and to consider the perspective of someone who may be stereotyped.

Independent Training

Some organizations offer training sessions intended to help individuals identify and reduce their implicit biases.

It’s crucial to note that there are no easy answers to avoiding or eliminating implicit bias, whether in life encounters or investing. Being aware of our propensity to harbor implicit bias within us is a first step, but only a first step. Mindfulness and training are useful in identifying the issue, but much more difficult and ongoing work is necessary to correct our thinking so that we can reduce our implicit biases where they exist.

The Bottom Line

An implicit bias is a subconscious predisposition that leads someone to hold negative attitudes or beliefs about a person based on their social group or other status. Implicit bias may concern issues of age, race, gender, socioeconomic status, and appearance, among others. These biases can affect many activities, including those in finance and investing.

For example, despite collectively representing a majority of the population, women and people of color who lead investment firms hold just a tiny fraction of total assets under management across the United States.