Lehman Sisters Wouldn't Have Failed
Tue 07 December 2010
, John Cookson, bigthink.com
The financial firms on Wall Street continue to be dominated by men. But research indicates that women may be better suited than men, biochemically, to succeed as traders and fund managers. It is all about hormones this time. Really!
"It is entirely possible that when it comes to making and losing money, women are less hormonal than men," John Coates, who studies the biochemical underpinnings of financial markets at Cambridge University, told Big Think.
A former Wall Street trader, Coates says his interest in the effects of hormones on trading was sparked by watching the behavior of male traders during the dot-com boom: "They had become delusional, euphoric, had racing thoughts, diminished need for sleep; they were taking way too much risk, getting hornier that usual," he recalls. "It’s not that Wall Street was selecting this type of person, because they weren’t like that before the bubble and they weren’t like that after the bubble. ... I suspected there was a chemical involved."
His research led him to the conclusion that economic bubbles "are a male phenomenon," a result of increased levels of testosterone that contribute to greater and greater confidence and appetite for risk. He says this testosterone boost is due to an evolutionary adaptation shared by males across species called the "Winner's Effect." After a competition, the winner comes out with higher levels of testosterone, while the loser comes out with lower levels.
But increased testosterone only increases performance up to a point. "As hormones increase in your body, your performance improves, until you get to what might be called the optimal level of this hormone for performing this task," says Coates. "If the hormone continues to rise, then your performance becomes impaired," he says, adding that overconfidence and poor risk planning can be outcomes of that impairment.
Coates says that because women have roughly 10% the amount of testosterone that men do, increasing the number of women in finance can dampen hormone-driven economic swings. But it isn’t simply that men are more reckless traders because of testosterone. Other research finds that women are better calibrated, biochemically, to manage risk in a bear market—including the risk central to a return on investment—because of the chemical cortisol.
"Men's cortisol levels respond very powerfully from competitive situations, and women not so much. Women's cortisol responses and stress responses seem more powerful from social stressors." According to this theory, which Coates has begun testing, a male's cortisol-fueled stress response might exacerbate a bear or middling market by responding with skewed memories and anxiety to events, whereas a female risk response would be more stable across a variety of circumstances.
The numbers don't lie, says Coates. Studies show that Hedge funds run by women turned an annual rate of return of 9% between 2000 and 2009—versus 5.82% from funds run by men. And men make 45 percent more trades than their female counterparts do—a gap that reduces their net returns by 2.65 percentage points per year compared with the 1.72 percentage points women lose on trading fees.
So would the recession would have been as bad—or would have happened at all—if women had had a larger presence in the financial sector?
Certainly those who invested with women did better during the depths of the financial crisis; while funds run by men dropped 19%, those run by women were down only 9.6%.
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