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Does Diversification Improve or Worsen US Credit Union Performance?

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“Bad advice tends to be simplistic. It tends to be definite, universal, and certain. But, of course, that’s the advice we love to hear. The best advice tends to be less certain—those researchers who say, ‘I think this is true in certain situations for some people.’ We should avoid the kind of advice that tends to resonate the most—it’s exciting, it’s a breakthrough, it’s going to solve your problems—and instead look at the advice that embraces complexity and uncertainty.”

David H. Freedman made this statement in support of his recent book Wrong: Why Experts Keep Failing Us—And How to Know When Not to Trust Them (Little, Brown and Co. 2010), which criticizes the research/expert community for publishing scientific findings that are extremely sexy but not necessarily true. Finding the one definitive silver bullet to solve a complex problem is a compelling proposition for researchers and consumers of research alike. We, too, would love to see definitive, simple answers to the important questions facing the credit union system, but frequently the results we present are filled with provisos, important considerations, and uncertainty.

William Jackson, a professor of management and finance at the University of Alabama, asks one of the most fundamental and important strategic questions for credit unions: whether to diversify across a range of products, services, and markets or to specialize in particular products, services, and markets. To accomplish this task, Jackson methodically tests whether diversification impacts credit union performance over a 10-year period (2000–2009). Jackson constructs diversification measurements around loan products, deposit products, revenue sources, and markets served (i.e., field of membership). He then conducts sophisticated statistical analysis to determine if, for instance, a credit union with a high level of deposit product diversification is correlated with better-than-average organizational performance. Jackson provides a number of control variables (asset size, net worth ratio, average state unemployment measures, etc.) to ensure that the relationships between the diversification and performance variables are the main source of comparisons.