4 Lessons from Iceland for Surviving a Financial Crisis


Diversity Bringing Balance

The CFA Institute European Investment Conference is a focused, interactive conference for Europe’s leading investment professionals. The 2017 CFA Institute European Investment Conference will bring portfolio managers, analysts, chief investment officers, and CEOs together in Berlin on 16–17 November.

Financial journalist Michael Lewis attributed Iceland’s 2008 financial collapse to “one of the single greatest acts of madness in financial history.” In his coverage for Vanity Fair, he wrote that “an entire nation without immediate experience or even distant memory of high finance had gazed upon the example of Wall Street and said, ‘We can do that.’”

Unfortunately, the country could not. Iceland’s banks ran afoul of shocks in the wholesale funding market, and foreign debt difficulties created problems with soaring interest rates, inflation, and unemployment.

In 2007, shortly before Iceland was hit by the financial storm, Halla Tomasdottir cofounded the investment firm Audur Capital. Her company would survive the crisis, and Tomasdottir herself would be cited as one of the women leading Iceland’s rescue. For Tomasdottir and her firm, the sound decisions necessary to survive the crisis were driven by four key values:

  • Risk Awareness: Tomasdottir sees a difference between being risk averse, or unwilling to take risks, and being risk aware, which means unwilling to take risks that are not completely understood.
  • Straight Talking: Using simple language that people understand to describe the good and bad aspects of choices and outcomes.
  • Profit with Principles: In addition to economic profit, Tomasdottir considers social and environmental benefits, taking a long-term view with a wider definition of profit.
  • Emotional Capital: Tomasdottir describes this as motivating, supporting, and connecting with the people she invests with. As she puts it, “When you only invest money, not much happens.”

In the nascent stages of Iceland’s economic peril, Tomasdottir and her cofounder were “overwhelmed with testosterone” at the helm of Iceland’s financial system; they felt that the forces driving the economy’s rapid growth were not sustainable. The above values from Audur Capital, which Tomasdottir describes as feminine, brought a different focus to the table — Tomasdottir says that incorporating feminine values into the investment process can lead to “better decision making and less herd behavior.”

Scientific studies have supported Tomasdottir’s assertion that a balance of perspectives is necessary to make sound investment decisions. In one paper published by the Proceedings of the National Academy of Sciences, the benefits of diversity were linked directly with the performance of financial markets, finding that markets with participants from diverse backgrounds saw trader behavior that applied better analysis and logic. The same paper found that participants from identical backgrounds were more likely to drive prices to irrational levels.

Regardless of how they are classified, “feminine” values can serve the financial industry well. A survey conducted by John Gerzema and Michael D’Antonio found a “strong consensus that what people felt were feminine competencies, they also deemed essential to leading in an increasingly social, interdependent and transparent world.” And as John Authers wrote in the Financial Times, “if investors want better outcomes, they would be better served if capital is allocated by diverse teams.”

At the 2015 European Investment Conference, Tomasdottir discussed her experience with the global financial crisis and how a more balanced set of values is crucial for sustainable financial services.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Photo credit: ©iStockphoto.com/erhui1979

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