Bankers Will Be Boys

Apparently, Anne Sibert has written an article at VoxEU describing three types of bad behavior committed by bankers that helped produce the crisis:

They committed cognitive errors involving biases towards their own prior beliefs; too many male bankers high on testosterone took too much risk, and a flawed compensation structure rewarded perceived short-term competency rather than long-run results.

I say “apparently” because I can’t get through to VoxEU despite trying three different browsers and two different computers (can’t ping it, either). But there’s a long summary over at naked capitalism

Everything she says sounds right, although the classification of three behaviors is a little frustrating, because they fall into three different categories. Confirmation bias is just part of the human condition; I’m not sure what we can do about that, short of inventing Cylons (and we know where that leads). Testosterone is part of the male branch of the human condition; so the potential solution is to have more female bankers. And flawed compensation structures are completely human creations, so we can definitely do something about them.

Yves Smith hones in on that last point:

The “bad incentives” turn of phrase, while narrowly correct, does not put blame where blame was due. The industry’s leadership designed the compensation schemes; they were not visited upon them by a mysterious outside force.

I’m familiar with confirmation bias (I suffer from it myself, of course) and with flawed incentive structures, but I found the second point the most interesting. Here’s an interesting excerpt from Sibert:

In a fascinating and innovative study, Coates and Herbert (2008) advance the notion that steroid feedback loops may help explain why male bankers behave irrationally when caught up in bubbles. These authors took samples of testosterone levels of 17 male traders on a typical London trading floor (which had 260 traders, only four of whom were female). They found that testosterone was significantly higher on days when traders made more than their daily one-month average profit and that higher levels of testosterone also led to greater profitability – presumably because of greater confidence and risk taking. The authors hypothesise that if raised testosterone were to persist for several weeks the elevated appetite for risk taking might have important behavioural consequences and that there might be cognitive implications as well; testosterone, they say, has receptors throughout the areas of the brain that neuro-economic research has identified as contributing to irrational financial decisions.

Let’s say you could provide reasonably convincing evidence that you would get better long-term results by using a team that had an even balance of men and women. Could you get away with an affirmative action policy that instituted a quota for female traders? According to the Supreme Court’s extremely mushy and frustrating “intermediate scrutiny” standard for gender discrimination, you would have to show that the policy is “substantially related” to the achievement of “important governmental objectives.” (I assume that there’s enough of a state-action component here, since we’re dealing with major, federally-regulated financial institutions.) Reducing systemic risk sounds like an important objective to me. 

Update: The link to VoxEU works now, and I fixed the name of the author of the article.

By James Kwak

28 thoughts on “Bankers Will Be Boys

  1. Or maybe we should just mandate that a certain percentage of traders have to be “effeminate”?

    I have a feeling the compensation structures are a better place to start.

  2. Hmmm. Testosterone and the profit motive – the perfect storm needed to trash the US economy! And let’s face it – those boys made a lot of bucks in the run up to the collapse!

    Your notion of getting gender-balanced teams managing the funds and the profit and the business won’t fly, for a wide range of reasons….

  3. James,

    Your blog is becoming mundane….boring nonsense, a re-hash of things that are obvious.


  4. I guess I should be amused by this, but it strikes me as a pretty weak argument. They did not actually show that the behavior led to losses over time or that the women consistently out-performed the men.

    Trading securities is a thrilling experience no matter who you are.

  5. Hi James,

    I can’t access VoxEU now too; but I remember reading the article yesterday. I am very certain the author is Anne Sibert from London’s Birkbeck College, not Horst Siebert.

    Best, Allen

  6. “Could you get away with an affirmative action policy that instituted a quota for female traders?”

    Depends…will Larry get a vote?

    “The percentage of tenured job offers made to women by the university’s Faculty of Arts and Sciences has dropped dramatically since Summers took office, prompting vigorous complaints from many of Harvard’s senior female professors.”

  7. “Confirmation bias is just part of the human condition; I’m not sure what we can do about that, short of inventing Cylons (and we know where that leads).”

    There is a large group of people who, by training, control their confirmation bias: scientists. Not perfectly, of course. In addition to their individual training, they have a social discipline that acts against it.

    “Testosterone is part of the male branch of the human condition; so the potential solution is to have more female bankers.”

    As may be. Testosterone is associated with risk taking. Males are more expendable than females. But very high risk takers, thrill seekers, are a fairly distinct group. Also, there is a large group of people who, by training, control their aggressive and risk taking behavior: martial artists.

    “And flawed compensation structures are completely human creations, so we can definitely do something about them.”

    We can definitely do something about the first two, as well. :)

  8. Starting to agree with AA (surprisingly). I would argue that trading floors are the most meritocratic places in our modern society (outside of professional sports), its just that the flaw is in the performance metric. Other, more sleepy areas of business, academia, law, medicine, etc. have problems with sexism and racism (implicit or explicit), or even just plain-old office politics. A trading floor is the only place where you’re performance is explicitly quantifiable. The only problem is, if the performance metric looks at short term profits too much relative to long-term stability, you’re going to end up with more risk-loving 25-year old men, rather than “level-headed women” or whatever you want to call them. Change the performance metric, and because performance is so easily quantifiable (X > Y), the demographic of the trading floor will change appropriately.

    That being said, this article completely misses the cause of this crisis. Bond Girl would know that trading floors have essentially two kinds of groups, flow-traders, and structurers. Flow traders are the cowboys that you think of who take positions in flow products which move up and down on a daily basis and wear their P&L number on their forehead. Despite the “seeming” risk in these activities, aside from the odd “blow up” (Nick Leeson), these guys are quite restrained by management in terms of the risks they take, AND they make relatively minimal use of balance sheet. On the other hand, the structuring desks, (especially the securitized structured products desks) are the ones filled with the math geeks who tell you a 5% default rate on subprime mortgages is a “8-sigma” event, and that management should lever up their balance sheet securitizing and selling off these MBS CDOs. These are the desks that blew up our banks. Ask them to measure the testosterone level when the quants were making the models and making the assumptions – I would argue that those levels were right around baseline.

    No, the flaw in our investment banks wasn’t a flood of testosterone…it was the hubris of thinking you were taking a “calculated risk,” and those calculations being all kinds of wrong.

  9. I would agree with this on many levels. It wasn’t just the traders either. Many in all levels – from Wall Street to Main Street as well – were lulled into a false sense of security by the comforting notion of the stability of large numbers. In such a large system, the thinking went, any losses in one area were easily contained through the volume produced in the rest of the portfolio. As in the natural sciences, there was a fundamental rule confirmed in this case: garbage in = garbage out. Any scientist learns this within the first few hours of looking at “modeled results”. With exceptions, models are usually pretty good in terms of internal consistency. The problem most times is the assumptions made before the “programmer” ever sits down behind his keyboard. Here as well. Large heterogeneous systems act differently than systems with reinforcing mechanisms built in. Few saw the fact that for all that this system (our country’s finances, including both Wall Street and Main Street) is large, it follows a herd mentality. If we really did all think for ourselves, then the models would probably work out pretty well. But we don’t; human nature dictates that we tend to congregate around similar ideas and “the next thing”. The results are obvious, in hindsight.

  10. Well James, in the past there were even more, in fact all male bankers and on top of testoserone, they were allowed to smoke and drink during the work day. I don’t know about you, but I’m always willing to take more chances after a few drinks then before. So what does this all mean?

    Modify the regulatory structure and compensation system. Change what you can change.

  11. The elephant in the room is gambling. Throughout the meltdown it has been compared to a “casino”, lenders made “bad bets”, etc. Yet the gambling issue is alluded to but hardly acknowledged. People are not recognizing that the financial system has been driven under by the same drama that can overwhelm individual families when an excessive risk-taker gambles away the family’s financial security and leaves innocent bystanders stuck holding the bag. Gambling behavior is a form of cognitive impairment (dementia is another cognitive impairment that also causes extreme behaviors with money). So it’s worth looking into the testosterone theory but it’s useful to examine the full spectrum of behaviors. All of the hand wringing about was it the fault of regulation or the fault of the media or the fault of money in politics is like the blind men with the elephant. I think we should view the financial excesses of the last few decades as like an epidemic, an infection of human behaviors that threatened a system central to human survival. The tools of public health used to identify and track epidemics might be helpful with this issue, in part because it’s based on gathering facts and somewhat neutral about class or gender warfare. The elephant here is that very wealthy risk-takers, mostly white men, were well capitalized with other people’s money (the flood of 401K payroll deductions, in particular), engaged in behaviors that endangered the public, and were enabled through elaborate methods of regulation that were easily manipulated. The gambling issue is enormously complex so I won’t be able to finish my thought here without ruining my own job by taking too much time to post a blog comment. I just want to say that bus drivers are regularly screened for the influence drugs and alcohol (behaviors that cause cognitive impairment and endanger the public), but money managers seem to never be examined for problematic behaviors that might signal risks for addictive gambling (with other people’s money). The euphoria of gamblers on a winning streak might be among the other distorted incentives in our financial system that feed the bubbles of our economy. We should find out.

  12. One concern I have is we’re lumping it all on the bankers. Sure, they deserve to be tied to the spit, but let’s face it, this was a society-wide pandemic.

    That is, the bankers were high on testosterone, the brokers were high on testosterone, the realtors were high on testosterone, and the buyers/investors (ie: us) were high on testosterone. Everyone was busy trying to get in on the buck, and that includes the vast majority of Americans. It was group-think (or a “shared testosterone high” as it were).

    The great guy that I am, I have to say I was not (but only because I was high on this stuff in the dot com bubble and actually learned my lesson).

    It’s like the Iraq war and torture. Suddenly everyone is against it, when in truth it happened because of the tacit support of all Americans (albeit, again, not me in my greatness).

    Or maybe it’s more like Nixon – if as many people didn’t vote for him as claimed they didn’t vote for him, Humphrey would have been the 37th president. Somehow when we get to these things, we have collective amnesia.

  13. If you had been writing about some highly paid profession “X” where the situation, based on male/female physiology and behavioral differences were reversed, and you had said instead “so the potential solution is to have more male X-ers” you’d no doubt be relegated to the hate-crime-o-sphere.

    Certainly provocative. Not sure why you chose to go there, Larry Summers, Steven Pinker, et al notwithstanding.

    Every time you start to psychologize, or analyze the sociological factors, etc, I start to lose interest. Damn.

  14. Why doesn’t anybody mention the insatiable desire of American Women to spend, spend, spend?

    Women make over 85% of the consumer purchases in the United States.

    Too much estrogen is the problem; not too much testosterone.

    I’m surprised the Flag of United States of Femerica isn’t colored Pink at this point.

  15. Can we get off this friggin’ topic? It’s getting sophomoric. I do not think a boys vs. girls debate is what this blog is supposed to be about. Let’s move on people to issues that really matter.

  16. I have downloaded a copy of the article and created a pdf. If anyone wants a copy, merely let me know via an email address posted as a response to this comment. In order to prevent spamming, etc., list the email address as johnsmith[the “at symbol”]

  17. Though anecdotal, i would like to offer some experience from a recent visit to shanghai, where the local society seems to be both aware and quite comfortable with the elephant in the room.

    On an average street off the bund adorned with hanging poultry and beef, i found what looked like an an open-door betting parlor, walked in. It was filled with middle-aged citizens glued to the the vast number of monitors, and a huge board on the back wall. Complete with cash desk (behind bars), individual work stations (a la poker machines) with all sorts of charts and graphs, stadium seating and ‘fire in their eyes’ 60-somethings having some good ‘ol fashion gambling fun.

    It was the stock exchange, open to the masses. I could sworn it was a race track.

    As far as I could tell, they use red for + and green for -. Beyond that blasphemy, I have to say that it was a refreshing case of loving it for what it is.

    Oh, and this talk of male/female trading issues is such a nothingburger.

    Can we get back to revealing stealing and cheating in our financial and political systems please?

  18. if testosterone is the problem, there is an easy solution. if money is the most important thing in your life, you will not have a problem with this.

  19. We already have a very successful model for dealing with hi-testosterone, young males – sports. Clear rules, refs, goals, penalties, etc.

    The brains/hormones/biology ain’t gonna change.

    We need type-a, hi-testosterone guys…and women…just don’t give them the ball and say “OK, run anywhere.”!?

    ‘Course they hate it but, that’s OK too. Every game has rules, dudes!


  20. So, Apparently Canadian men, German men, and Saudi Arabian men don’t have testosterone???? This Anne Sibert woman has really deep analysis. Deep…….right up to my neck in something.

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