Male crisis

Is the world of finance too male?

David Orrell
March 5, 2012

The recent subprime, credit-crunching, sovereign-defaulting global crisis obviously had many causes, but one fact seems unavoidable: nearly everyone involved, at least at a senior level, was a guy.

In Iceland, for example, many believe that the banking collapse which originated there in 2008 had its roots in what Halla Tómasdóttir from Audur Capital called ‘typical male behaviour’. As she told Der Speigel: ‘It’s always the same guys. Ninety-nine percent went to the same school, they drive the same cars, they wear the same suits and they have the same attitudes.’

When David Hare wrote his 2009 play The Power of Yes, about the financial sector, he only had parts for two women in a total cast of twenty. He told the Financial Times: ‘that is probably about right. It’s shocking how few women there are in finance.’

Many alpha-male Wall Street traders remain convinced that testosterone is behind their financial success (or lack thereof). One result of the crisis, according to a recent report, is that increasing numbers of traders are approaching clinics to have their testosterone levels artificially boosted, in the hope that this will restore their edge. Sales of testosterone injections and pills are booming.

While few would dispute the overwhelming maleness of the financial sector, it is more controversial to suggest that this gender imbalance could have played a role in the crisis. But there is mounting evidence that gender does affect the way we make financial decisions, especially when it comes to things like risk.
For example, one paper entitled ‘Testosterone and financial risk preferences’ showed that testosterone levels are a predictor for risk-taking. Trader testosterone levels soar during booms and fall during crashes, which helps amplify price swings. Furthermore, high levels ‘may shift risk preferences and even affect a trader’s ability to engage in rational choice.’ Testosterone injections might therefore be too much of a good thing.

A 2001 study called ‘Boys Will Be Boys: Gender, Overconfidence and Common Stock Investment’ found that ‘men are more prone to overconfidence than women’ and therefore ‘trade more and perform worse than women.’ This finding appeared to be backed up by a 2009 report by Chicago-based Hedge Fund Research which found that, while women manage only about three percent of total funds, these fell half as much during the crisis as those managed by men, and also outperformed them over the previous ten years.

Of course, these studies are not making generalisations about all men and all women, or saying that women are in some sense better than men (I hope). They are only making empirical observations about patterns in behaviour, which have complex causes. But whichever way you look at it, it would seem logical for companies to recruit more women. As Lu Hong and Scott E. Page wrote in The Journal of Economic Theory: ‘There seems to be a strong consensus that diverse groups perform better at problem solving.’

So why isn’t it happening? One reason is that, as people such as Tómasdóttir have pointed out, there is a certain lingering prejudice against women in banking. Finance has traditionally been viewed as a male preserve, and a few fancy research reports in academic journals isn’t going to change that overnight.

Still, if markets were really efficient, then economic theory tells us that female traders would be more successful and over time would dominate. As Milton Friedman wrote, ‘There is an economic incentive in a free market to separate economic efficiency from other characteristics of an individual,’ and that should include gender.

To see what is wrong with this theory, one need only point out that it isn’t just finance which is dominated by men – it is also economics. The idea that markets are rational, efficient, and perfectly competitive is, we must admit, another typically male conceit which ignores factors such as industry norms and the complex social context (i.e. the fact that bankers are nearly all males).

Economic man
The prejudice against women applies not just to finance, but even to thinking about anything numerical – and its roots go very deep. In ancient Greece, mathematics was seen as an exclusively male activity. Aristotle, for example, barred women from entering his Lyceum. While he believed that women were capable of rational and deliberative thought, he described it as ‘without authority’. Many university departments did not admit women until the early 20th century. In C.P. Snow’s famous 1959 book The Two Cultures he added in a footnote that: ‘whatever we say, we don’t in reality regard women as suitable for scientific careers.’

In many ways, economics is an extreme case of this male dominance. Even today, female economists remain under-represented in the higher echelons of academia. It took until 2009 for the Nobel Prize in economics to be awarded to a woman, Elinor Ostrom, who is a political scientist and not an economist.

According to Linda Tarr-Whelan, author of Women Lead the Way, women need to attain a critical mass of 30 per cent in order to have serious influence, and most economics departments are nowhere near that level. It is therefore unsurprising that mainstream economics is characterised by a rather male feel.

Perhaps the most blatant example is the concept of rational economic man. The economist Julie A. Nelson notes that the characteristics of being ‘self-interested, autonomous, rational, and free to choose among different actions’ are considered in modern Western and English-speaking cultures to be associated with stereotypical masculinity, while the converse – ‘people who are dependent, emotional, and subject to decisions made by others or influences from the social or natural environment’ – are associated with stereotypical femininity. Based on this, rational economic man is best viewed as a projection of idealised male behaviour.

The result of this bias is that mainstream economic theory downplays things like emotions or human connectivity. This is a problem, since markets rely for their existence on emotions such as trust and confidence. Without trust there is no credit, and without confidence there is no risk-taking. And connectivity is what drives the herd behaviour behind surges and crashes.

It might be a while before they are handing out estrogen pills on Wall Street.

But to rebalance our economic system, a first step would be to recruit more women in both business and academia.