Lehman Sisters Wouldn't Have Failed

Because of their biochemical makeup, women are better than men are at managing risk. As a result, female equity managers yield higher returns for their clients and are better at navigating downturns.

Even as high-profile, high-profit professions like medicine and the law have edged toward gender parity, 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 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. "Women would be less hormonally reactive and their risk preferences would be more stable across the business cycle than men's are."

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."  Male animals that win a competition are statistically more likely to win in the next round, he says. That's because when two males go into a fight their testosterone levels rise—increasing lean-muscle mass and hemoglobin in their blood (and thus its capacity to carry oxygen).  As well, testosterone also affects the brain, increasing confidence and appetite for risk.  After the competition, the winner comes out with higher levels of testosterone, while the loser comes out with lower levels. “From an evolutionary point of view, if you’ve just lost a fight you probably shouldn’t be looking for another fight,” says Coates. 

As the winning animal goes into the next round, his testosterone levels stay elevated, increasing his confidence and spurring more risk-taking.  "He goes into the next round with an edge," says Coates. "His T levels bump up again, and he goes on this sort of positive feedback loop."

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. 

The same thing holds true for traders, says Coates. "They put on a trade and get it right, their T levels bump up, they become confident and take more risk, until eventually they go overtop this curve, becoming overconfident, delusional, and they put on huge trades with terrible risk-reward tradeoffs. ... And that is precisely what you see in the markets when these bull markets are reaching their peak.” 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.

"People suffering chronic stress and high levels of cortisol feel anxious and the memories they recall change," says Coates.  "Under the influence of high levels of stress hormones, they tend to recall mostly negative precedents," he says.  Men and women produce roughly the same amounts of cortisol, and they are equally as reactive, but they respond to different events differently, says Coates.

"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. "Women have been found over a long period of time to outperform men by up to two percent return—which is a lot," he says. According to BusinessWeek, 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 over the same period. A study by U.C. Davis researchers also found that men in the financial industry 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%. And mutual fund company Vanguard published a study in March indicating that men "were much more likely than women to sell their shares at stock market lows. Those sales presumably meant big losses—and missing the start of the market rally," according to the New York Times.

More Resources

— Coates, J. “From molecule to market: steroid hormones and financial risk-taking.”

— Coates, J. “Endogenous steroids and financial risk taking on a London trading floor.” 

— Barber, B., and Odean, T. "Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment." 

— "Equity Abandonment 2008-2009," report by Vanguard.

— "2010 Top Women Financial Advisors," Barrons.

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