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.

LinkedIn meets Tinder in this mindful networking app

Swipe right to make the connections that could change your career.

Getty Images
Swipe right. Match. Meet over coffee or set up a call.

No, we aren't talking about Tinder. Introducing Shapr, a free app that helps people with synergistic professional goals and skill sets easily meet and collaborate.

Keep reading Show less

The dos and don’ts of helping a drug-addicted person recover

How you talk to people with drug addiction might save their life.

  • Addiction is a learning disorder; it's not a sign that someone is a bad person.
  • Tough love doesn't help drug-addicted people. Research shows that the best way to get people help is through compassion, empathy and support. Approach them as an equal human being deserving of respect.
  • As a first step to recovery, Maia Szalavitz recommends the family or friends of people with addiction get them a complete psychiatric evaluation by somebody who is not affiliated with any treatment organization. Unfortunately, warns Szalavitz, some people will try to make a profit off of an addicted person without informing them of their full options.
Keep reading Show less

10 science photos that made history and changed minds

These photos of scientific heroes and accomplishments inspire awe and curiosity.

Surprising Science
  • Science has given humanity an incalculable boost over the recent centuries, changing our lives in ways both awe-inspiring and humbling.
  • Fortunately, photography, a scientific feat in and of itself, has recorded some of the most important events, people and discoveries in science, allowing us unprecedented insight and expanding our view of the world.
  • Here are some of the most important scientific photos of history:
Keep reading Show less

In a first for humankind, China successfully sprouts a seed on the Moon

China's Chang'e 4 biosphere experiment marks a first for humankind.

Image source: CNSA
Surprising Science
  • China's Chang'e 4 lunar lander touched down on the far side of the moon on January 3.
  • In addition to a lunar rover, the lander carried a biosphere experiment that contains five sets of plants and some insects.
  • The experiment is designed to test how astronauts might someday grow plants in space to sustain long-term settlements.
Keep reading Show less