"Male traders are from Mars
- Posted by:
- Economist.com | NEW YORK
- Behavioural Economics
THERE is something refreshingly Northern European about the argument that a good and effective way to reform finance is to bring more women into the room. Anne Sibert, an economist, notes Iceland had just one senior female banker, and she quit in 2006. Would things have been different if more Icelandic women worked in finance?
Ms Sibert cites evidence that there exists something particular about male brain chemistry which perpetuates bubbles. An investor may buy into a known bubble so long as he reckons it will continue into the next period. He counts on his ability to time the market and sell the asset before the bubble pops. The research suggests making money off a bubble in the early stages, inflates male over-confidence, and this feeds the bubble’s growth.
In a fascinating and innovative study, Coates and Herbert (2008) advance the notion that steroid feedback loops may help explain why male bankers behave irrationally when caught up in bubbles. These authors took samples of testosterone levels of 17 male traders on a typical London trading floor (which had 260 traders, only four of whom were female). They found that testosterone was significantly higher on days when traders made more than their daily one-month average profit and that higher levels of testosterone also led to greater profitability—presumably because of greater confidence and risk taking. The authors hypothesise that if raised testosterone were to persist for several weeks the elevated appetite for risk taking might have important behavioural consequences and that there might be cognitive implications as well; testosterone, they say, has receptors throughout the areas of the brain that neuro-economic research has identified as contributing to irrational financial decisions.
If—as the research may suggest—men are less risk averse than women, then a work group composed primarily of men (or primarily of women) may be a particularly bad idea. A vast psychology literature documents the phenomenon that group deliberation tends to result in an average opinion that is more extreme than the average original position of group members. If a group is composed of overly cautious individuals, it will be even more cautious than its average member; if it is composed of individuals who are overly tolerant of risk, it will be even less risk averse than its average member (Buchanan and Huczynski 1997).
You need a little overconfidence to be successful in finance and business, but too much mixed with a competitive drive and herd behaviour can have disastrous results. Can more women at the table temper this effect? Perhaps, but that would require everyone at the table listening, respecting one another, and not taking what gets said personally. In the fast-paced, ego-driven world of finance, overcoming age-old communication problems between the sexes is a tall order."Me: