Gender
inequality has been an issue in the City for years, but now the new
science of 'neuroeconomics' is proving the point beyond doubt:
hormonally-driven young men should not be left alone in charge of our
finances.
For the past few weeks I've had two books by my bed, both of
which offer a first draft of what history may well judge the most
significant event of our times: the 2008 financial crash. Read together,
they are about as close as we might come to a closing chapter of The
Rise and Fall of the American Empire. As literature, one of them – the
final report of the
Financial Crisis
Inquiry Commission of the US Treasury – doesn't always make for easy
reading: there are far too many nameless villains for a start. And,
quite pointedly, there is not a heroine in sight. Reading the report I
became preoccupied by, among other things – the fairy steps from
millions to billions to trillions, say – the overwhelming maleness of
the world described. The words "she", "woman" or "her" do not appear
once in its 662 pages. It is a book, like most historical tragedies,
written about the follies and hubris of men.
The other book, an entirely compulsive companion volume, is Michael Lewis's best-selling
The Big Short, which
Google Earths you into the crisis. Rather than looking at a global
picture, it lets you into the bedrooms and boardrooms of the individual
corporate men who catastrophically lost billions of dollars and, on the
other side of those bets, the extraordinary ragtag of obsessive
individuals who saw what was coming and made eye-watering fortunes. It
gives the crash a human face, and once again that face is universally
male.
The books are linked by more than subject matter, though.
Lewis, a one-time bond trader himself – he left, 20-odd years ago, in
incredulity and disgust to write his insider's account,
Liar's Poker
– gave evidence to the Crisis Inquiry Commission over the course of its
18-month sitting. In the end, however, he refused to sign off the
report; and not only did he refuse to sign it, he also refused to put
his name to the dissenters' addenda to the report, which three of the
committee insisted upon. And not only that, he did not add his name to
that of the single individual who insisted on a further addendum stating
that he dissented from the dissenters' view. Lewis was not a fan of the
report.
The reason for this was simple, he suggested. He felt
that the committee, for all its considered judgment, had not understood,
from the outset, a single, pivotal word. That word was "unprecedented".
Though the inquiry had set out in the belief that the crash was an
event different in kind to anything that had gone before, it
nevertheless proceeded to judge it in the terms of previous crashes.
What it failed to do, in Lewis's eyes, was this: it neglected to look
for the things that might have changed in Wall Street or the City, the
things that might have made individuals on the trading floors act in
ways that were seen to be entirely, unprecedentedly, reckless. When he
came to consider these things himself, Lewis felt that perhaps chief
among the unprecedented novelties was this one: women.
"Of
course," he observed, with tongue firmly in cheek, "the women who
flooded into Wall Street firms before the crisis weren't typically
permitted to take big financial risks. As a rule they remained in the
background, as 'helpmates'. But their presence clearly distorted the
judgment of male bond traders – though the mechanics of their influence
remains unexplored by the commission. They may have compelled the male
risk-takers to 'show off for the ladies', for instance, or perhaps they
merely asked annoying questions and undermined the risk-takers'
confidence. At any rate, one sure sign of the importance of women in the
crisis is the market's subsequent response: to purge women from senior
Wall Street roles…"
When I first read those remarks it was not
clear how much in earnest Lewis had been when he made them.
Subsequently, though, I heard him speak at the London School of
Economics, and he took this idea in a slightly different direction. When
asked what single thing he would do to reform the markets and prevent
such a catastrophe happening again, he said: "I would take steps to have
50% of women in risk positions in banks." Pressed on this, he went on
to suggest how science reveals that women in general make smarter
decisions regarding investment than men, that when it comes to money,
women in couples are demonstrably better at evaluating risk than their
partners, and single women much better still.
Though those of us
males who have an uncanny sense of money always slipping through our
fingers might anecdotally believe this to be true, I was surprised to
hear it stated as a fact. It seemed to beg a number of questions. First,
if women really are better at making these judgments, why is it always
men, still, without exception, who troop out before select committees to
explain where it all went wrong, and how they weren't really to blame.
And second, would it really be different if women were in charge?
You
don't have to look too far into the science to realise that Lewis's
claim, in broad terms, stands up. The first definitive study in this
area appeared in 2001 in a celebrated paper that broke down the
investment decisions made with a brokerage firm by 35,000 households in
America. The study, called, inevitably, "Boys will be Boys" found that
while men were confident in making multiple changes to investments,
their annual returns were, on average, a full percentage point below
those of women who invested the family finances, and nearly half as much
again inferior to single women.
A more recent study of 2.7
million personal investors found that during the financial crisis of
2008 and 2009, men were much more likely than women to sell any shares
they owned at stock market lows. Male investors, as a group, appeared to
be overconfident, the author of this study suggested. "There's been a
lot of academic research suggesting that men think they know what
they're doing, even when they really don't know what they're doing." A
fact that will come as a surprise to few of us. Men, it seemed,
typically believed they could make sense of every piece of short-term
financial news. Women, never embarrassed to ask directions, were on the
whole far more likely to acknowledge when they didn't know something. As
a consequence, women shifted their positions far less frequently, and
made significantly more money as a result.
Naturally, if these
findings were widely applicable, then it would be hard not to agree with
Lewis's suggestion for reforming the sharpest end of capitalism. Rather
than ring-fencing casino investment banks or demanding that high street
banks hold vastly greater capital,
as we heard at the Mansion House last week, wouldn't a safer model just be to hire more women?
To
argue this case, you would probably need more than just behavioural
evidence; you might need to understand some of the mechanisms which
produced the trillion-dollar bad decision-making that led to what
happened in 2008. In recent years, and particularly since the crash, a
new science of such decision-making – neuroeconomics – has become
fashionable in universities and beyond. It proposes the idea that you
will create a better understanding of how people make economic choices
if you bring to bear advances in neurobiology and brain chemistry and
behavioural psychology alongside traditional economic maths models. Not
surprisingly, neuroeconomics has plenty to say about the question of
whether decision-making, in high-pressure situations, divides on
gender lines.
The
problem is that most of the scenarios used to investigate this divide
are artificial. It is one thing attaching someone to an MRI scanner and
telling him or her that a million pounds rests on their decision in a
game; it is another when that person actually stands to lose a million
pounds. Only one study, as far as I could discover, has had access to
the brain chemistry, the neural biology, of young men actually working
on trading floors. But the results it produced were nonetheless
startling.
The study was led by a pair of Cambridge researchers. One, Joe Herbert, is a professor of
neuroscience,
and the other, John Coates, a research fellow in neuroscience and
finance. Herbert, a specialist in the effect of hormones on depression,
was fascinated to put some of his theories about the role of chemicals
on decision making into practice. The curious thing about banks, he told
me, "was that they know all about computers and systems and markets but
they know next to nothing about the human machine sitting in the chair
in front of screens making decisions. Nothing. We aimed to correct that
just slightly."
It was Coates, though, who made the experiment
possible. Having met Herbert at his lab in Cambridge, I met Coates in a
pub in west London. He had a special advantage in gaining access to bond
traders' brains, he explained: he used to possess one himself.
Sharp-eyed and fit-looking, Coates retains the intensity of a man who
used to run a trading desk on Wall Street during the dotcom bubble. He
started off at Goldman Sachs and went on to Deutsche Bank. After some
years trading, and making a lot of money out of a lot of money, he
became increasingly fascinated by the way, during the dotcom years, the
traders he worked alongside radically changed behaviour. They became, he
says, "euphoric and delusional. They were taking far more risks, and
were putting up trades with terrible risk-reward profiles". The dotcom
was fun, in a way, he suggests; it was like the roaring 20s. "But I
don't think anyone looks back on the housing bubble and laughs."
Coates
was a relatively cautious trader himself, but there had been times when
he too felt this surge, this euphoria: "When I had been making a lot of
money myself, I felt unbelievably powerful," he recalls. "You carry
yourself like a strutting rooster, and you can't help it. Michael Lewis
talked about 'Big Swinging Dicks', Tom Wolfe talked about 'Masters of
the Universe' – they were right. A trader on a winning streak acts
exactly that way."
The second thing that Coates noticed was even
more revelatory to him. "I noticed that women did not buy into the
dotcom bubble at all," he says. "You couldn't find one who did, hardly.
And that seemed like a pretty cool fact to me."
With this cool
fact in mind, Coates began splitting his time between his trading desk
and the Rockefeller University in Manhattan, which is perhaps the
world's leading institute for the study of brain chemicals. There he
started to become interested in steroids, and in particular something
called "the winner effect". This occurs when two males enter a
competition and their testosterone levels rise, increasing their muscle
mass and the ability of the blood to carry oxygen. It also enhances
their appetite for risk. Much of this testosterone stays in the system
of the winner of a competition, while the loser's testosterone melts
away fast; in evolutionary terms, the loser retires to the woods to lick
his wounds. In the next round of competition, though, the winner
already has high levels of testosterone, so he starts with an advantage,
and this continues to reinforce itself.
"Steroids," Coates
explains, "like most chemicals in your body, display what is called an
inverted U-shaped response curve." That is to say, when you have low
levels of them you lack vitality, and do very poorly at mental and
physical tasks. But as the levels rise you get sharper and more focused
until you reach an optimum. The key thing is this, however: "If you keep
winning, your testosterone level goes past that peak and sliding down
the other side. You start doing stupid things. When that happens to
animals, they go out in the open too much. They pick too many fights.
They neglect parenting duties. And they patrol areas that are too
large." In short, they behave like traders on a roll; they get cocky.
Coates
became convinced that this winner effect was what he observed in
bullish trading markets, and what ended up dramatically distorting them.
It also explained why women were mostly immune to the euphoria, because
they had only 10% of the testosterone of men. What struck him most,
though, was that, for all the literature about financial instability,
economics, psychology, game theory, no one had ever clinically looked at
a trader who was caught up in a bubble.
Coates wrote a research
proposal. He came back to Cambridge where he had done his first degree,
and because of his background eventually gained access, with Herbert, to
a major City bond-dealing floor in London. They tested the traders for
two hormones in particular, testosterone and cortisol (the anxiety
induced, depressive "stress hormone"), and mapped their levels over a
period of weeks against the success or failure of trades, individual
profit and loss. Coates had imagined the experiment to be a preliminary
study but the correlations he found – for evidence of irrationality
produced by the winner effect and its converse – was "an absolute
dream". They not only discovered that a trader's morning testosterone
level could be used to predict his day's profitability. They also found
that a trader's cortisol rose with both the variance of his trading
results and the volatility of the market. The results pointed to a
further possibility: as volatility increased, the hormones seemed to
shift risk preferences and even affect a trader's ability to engage in
rational choice.
Though the sample was limited, and suitable
caution was needed in claiming too much, the correlations suggested that
over a certain peak, testosterone impaired the risk assessment of
traders. "And cortisol," he suggests, "was in some ways even more
interesting than testosterone. We thought cortisol would rise when
traders lost money," Coates says, making individuals more than usually
cautious, "but actually it was going up incredibly when they were faced
with just uncertainty. The stress hormones were switching over to
emergency states all the time. There was an optimal level but these
stress hormones can linger for months. Then you get all sorts of really
pathological behaviours. If you are constantly prepared for high tension
it affects your brain, and it causes you to recall stressful memories
and become exaggeratedly risk-averse and kind of helpless."
Unfortunately
this particular study ended in June 2007, before the full effect of the
crisis, but its implications account, Coates believes, for some of what
he subsequently heard from the trading floor. "If cortisol goes beyond a
certain point, then it may become very difficult for traders to assess
any risk at all. These guys are not built to handle adversity that well.
There is an observable condition called 'learned helplessness', which
if you are submitting to great stress over a long period of time makes
you give up suddenly. Lab animals develop it: you open the cage and they
won't escape. Traders have it too. They just slump in their chairs. In
the crisis there were classic arbitrage opportunities as the markets
were falling. Free money. But traders would sit there staring at the
numbers and not touching it."
Since then, Coates has partly been
working on the other strand of his original hypothesis, looking at the
brain chemistry of women working in the markets. Because of the small
sample sizes he has to work with – there were only three women out of
250 traders on the floor he first tested – the detail of that is far
from complete, and he is properly reluctant to draw conclusions. What he
will go so far as to say, though, is this. "Central bankers, often
brilliant people, spend their life trying to stop a bubble or prevent a
crash, and they are spectacularly unsuccessful at it. And I think it is
because, at the centre of the market, you have these guys either ripped
on testosterone or overwhelmed by cortisol so that they become
completely price insensitive." Coates wrote a couple of articles after
that research was published, suggesting that, if the winner effect was
right, it was possible that bubbles were an entirely young male
phenomenon. And if that were the case, then the best way of preventing
boom and bust was to have more women and more older men – less in thrall
to hormones – in the markets. "We know that opinion diversity is
crucial to stable markets. What no one talks about is endocrine
diversity, a diversity of hormones. The billion-dollar question is how
to achieve it."
To most experienced, male, investment bankers, of
course, this sounds like fighting talk. An old friend of mine, who
traded his Cambridge English degree for an extremely lucrative life as a
bond dealer, offered this, when I presented Coates's evidence to him.
"It would be nice to think that having more female traders on the floor
would make for less volatility," he said, "but that's wishful thinking.
Financial markets are now global, so while we in the west might decide
not to chase trends or react instinctively to breaking news because
there are mature mothering types in boardrooms and sitting on risk
committees, the rest of the world will, and our banks would lose out."
And that's not all. "Many of the women I know who have managed money or
have put capital at risk for banks have tended to be even more
aggressive with risk than their male counterparts, as if perhaps to
compensate for their supposed diffidence. Fighting their way through a
male-dominated environment to a position in which they can invest/punt/
risk-manage, many women develop an ultra-masculine persona so as to be
thought of as ballsy…"
Just a cursory glance through some of the
recent spate of books and blogs written by young women who have worked
in the City and lived to tell the tale would certainly seem to support
this observation. Melanie Berliet, who worked as one of the only female
traders in Wall Street, set the tone in her confessional blog: "If
anything," she observed, "my token status gave me an extra thrill. I
enjoyed being called a 'fucking dullard' or being instructed,
patronisingly, to 'remove head from ass', because my reaction – to grin
rather than cry – impressed the guys. I loved their attention and the
daily opportunities to prove that I fitted in. What separated me from my
colleagues was physical: my 5ft 9in, 120lb frame, my long, blondish
hair – and my vagina. I had two options with my boss: trade sexual
banter or resist. Typically, I chose the former. Like most traders, my
base salary wasn't terribly high—$75,000 at the start of my third year.
The bonus was all, and getting the right number rested on one thing, as I
saw it: my willingness to promote my boss's fantasy of fucking me…"
John
Coates doesn't believe the caricature, or at least he believes that in
the upper reaches of banks, things have moved on. "A lot of my former
colleagues are running divisions, or whole banks," he says. "I don't buy
the sexist macho argument. The big investment banks desperately want
women traders. But when they interview women who are qualified, the
women don't want to do it…"
Neuroeconomics also starts to provide
the answers to some of the reasons for that. Muriel Niederle is a
professor at Stanford University, looking at gender differences in risk
decisions. Over a period of years Niederle has developed clear evidence
for the theory that though in non-competitive situations women
demonstrate an advantage over men in making investment decisions, they
either shy away completely from making those decisions in intensely
competitive environments, or they respond less well than men to
competition with very short-term high intensity and results-driven
focus. This pattern is set, Niederle proves, from a very young age (and
no doubt has a good deal to do with the differential presence of
troublesome testosterone). Joe Herbert told me at his lab in Cambridge:
"What is clear is that there are neurological differences between the
sexes. Women, in very general terms, are less competitive, and less
concerned with the status of being successful. If you want to make women
more present, you have to remember two things: the world they are
coming into is a man-made world. The financial world. So, either they
become surrogate men… or you change the world."
Ah, changing the
world. In the wake of 2008, there was a good deal of talk about that
heady idea. Much of this talk concerned the creation of more gender
balance in the city. The
Economist coined the phrase
"Womenomics" and argued that excluding nearly 50% of talent from crucial
positions in business and finance was not only discriminatory but
caused serious harm to stability and growth. Iceland's banks brought in
women to clear up the mess that men had left. A good deal was made of
the fact that the extraordinary success of microfinance in the
developing world was because 97% of the loans were granted to women (men
were – biologically? culturally? – not to be trusted). Science,
neuroeconomics, was harnessed to develop some of those themes. And then,
well, nothing. The commissions and the select committees decided that a
return to something like the status quo, with all its implicit risks
and inequalities, was the only option.
Womenomics still persists in a few places, however.
The 30% Club
was an initiative set up last November by executive women, and some
senior men in FTSE 100 companies and accountancy and legal practices, to
increase the number of women in decision-making and boardroom positions
to that figure. It goes a little further than Lord Davies's recent
report on the subject. But 30% is not an arbitrary number; it is thought
– by neuroeconomists again, and through observation – to be the minimum
proportion of women at the top of an organisation required to begin to
change the culture; below that number, women tend to behave "like
surrogate men"; above it, the subtle differences produced by gender
might begin to influence the way decisions are made. In Britain there is
still a good way to go: only 5.5% of executive directors in FTSE 100
companies are women (yet evidence shows that companies with women
leaders have a 35% higher return on equity, and companies with more than
three women on their corporate board have an 80% higher return on
equity). On city trading floors, the percentage remains, for some of the
reasons outlined above, at around 3% or 4%. Testosterone rules.
The
country that has attempted most radically to change this balance is
Norway, where a Conservative minister imposed a quota of 40% female
directors in every boardroom. Most of the data suggests the initiative
has been a great success, both culturally and commercially (though some,
male, commentators argue that the turnaround is better explained by the
spike in oil prices).
It would be hard to find many people in the
city, even among women, who would favour quotas, though that argument
can be made. John Coates, wearing his dealmaker's hat, suggests a
practical solution. "The question is not whether men are risk takers and
women are risk-averse. It is more what kind of risk do they want to
take? My hunch is that women don't like high-frequency trading, so what
you have to do is change the accounting period over which they are
judged."
He then gives me a potted description of how things
remain: "Say you have two traders. One trader makes $20m a year for five
years, of which she might typically pocket a couple of million a year
herself. At the end of five years she has made the bank the best part of
$90m. Another trader makes $100m a year for four years. They don't want
that guy to go off to a hedge fund so they let him take home $20m a
year. But then in the fifth year – because of the winner effect – he
loses $500m. That is essentially what happened in the financial crash.
The bank has lost $100m and the trader has gained $80m. If you were
judging these things over a five-year period, then you can see which
person you would hire."
But, of course, that would require a very
different idea of markets, and of money, to the one that is currently
desperately being defended and remade. It would certainly require a
greater degree of "endocrinal diversity". Still, the next time you hear
someone suggest that things are getting back to "normal" in the city,
and that we should at all costs start believing in exponential growth
again, at least you can look him in the eye and state that you think his
hormones might be playing up.
Neuroeconomics: Six things that the science of decision-making reveals
■
If groups of young men are shown pornographic pictures of women and
then asked to choose between safe and risky investments, compared with
men shown non-pornographic pictures they choose far riskier portfolios.
■
Our brains are designed to seek out novelty, but too much information
can overwhelm them; we are generally better at assessing risk when
listening to Bach than with the chatter of TV news.
■ Men's brains
tend to shut down after they have proposed a deal, waiting for the
response. Scans show that women brains continue to be active, analysing
whether they have done the right thing.
■ Humans are the only
animals that can delay gratification, a function of the prefrontal
cortex. However, the prefrontal cortex only matures after the age of 30,
and later in men than women. Before that, we are more likely to seek
immediate gratification.
■ Our brains reward social interaction
with the release of a chemical called oxytocin. It makes us feel good
when we follow the herd. Stock market bubbles are one likely result of
this.
■ Our brains are wired for human oxytocin-mediated empathy
(or HOME). We are biologically stimulated to love (or hate) what is most
familiar to us. We are built to form attachments, to value what we own
more than what we do not own. This fact skews the rationality of all our
investment decisions.
source: http://www.guardian.co.uk/world/2011/jun/19/neuroeconomics-women-city-financial-crash
