Bankers Behaving Badly

Posted By Penny Lemov | May 20, 2009

This is from an economist's blog: The discussion is about why, during the go-go years leading up to the present recession, bankers took so much risk, thereby bringing down the economy.

The blogger, Anne Siebert at VoxEU , notes this premise: " There is a substantial economics literature on the effect of gender on attitudes toward risk and most of it appears to support the idea that men are less risk averse than women in their financial decision making."

She then notes a bit of that literature:

"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."

Another blogger, (James Kwak at Baseline Scenario) zeroes in on the policy implications:

"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."

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