The promise of DEI was that a more diverse and representative workforce would bring better outcomes, because it was also supposed to bring fresh insights and good judgment. But in several sectors the “diversity dividend” has proved elusive, and in academia DEI efforts often result not in a variety of viewpoints but in intellectual conformity.

The way these initiatives were practiced, they essentially created new constraints in investing and hiring decisions. And it is a basic law of optimization that the more constraints you impose, the smaller the output you get.

The question is, what comes next? The virtue bubble may have popped, but it will not disappear entirely — the virtue industry is just too large and too ingrained. And DEI and ESG are not without public support. Polls show people like DEI, for example, just not in their own workplace. The disconnect may be due to the difference between intentions and execution.

Parts of the virtue economy will surely be rebranded. Other parts will probably shrink. ESG funds may become a niche product, a box that you check at the end of your 401(k) investment menu, while DEI programs become part of those online HR training modules no one really pays attention to.

They could also be reformed — but this would mean accepting the idea that imposing constraints doesn’t increase outputs. For ESG investing, maybe this means more funds that focus on climate solutions, instead of promising to avoid certain companies. That will be riskier, since the investment horizon is longer and more uncertain, but they may also offer more potential upside, and they can be balanced with more traditional assets to suit an individual investor’s needs and values. For DEI, that may mean reframing it not as a restriction on who can be hired, but as an affirmative plan to discover and cultivate talent from people of underprivileged backgrounds.

None of this will be easy. But as we’ve learned, in markets there is no free lunch. Good ideas don’t create value if they’re not executed well — and that means being honest about the trade-offs even the best ideas require.

Allison Schrager is a Bloomberg Opinion columnist covering economics. A senior fellow at the Manhattan Institute, she is author of “An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk.”

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