Blame it on Hormones: Men are the Cause of Today's Problems

The Wall Street Journal has had a flurry of great headlines lately: "Inside Fumbled Facebook IPO" and "JP Morgan Reveals 'London Whale'-Size Losses." While reading these and other stories about the massive losses surrounding the Facebook IPO and JP Morgan's hedging losses, I couldn't help but notice how it was men who caused the vast majority of these recent (and several past) problems. What if Facebook's all-male Board of Directors had chosen a female investment banker to head up their ill-fated IPO? What if the "London Whale" or his male boss had been a woman? What if Enron's bad boys had been girls? What if Nick Leeson, who ruined Barings, had been named Nicole? How many bonuses could Societé Générale have paid with the $7 billion blown by rogue trader Jérôme Kerviel if he had been a she?

I've written in the past about how hiring more women can reduce risk. Several studies have shown that women are more profitable investors, money managers and hedge fund managers, and they incur less risk in the process. A number of factors may be at work here. Some researchers suggest this is because men tend to be more overconfident than women and when they succeed at something, they attribute it to their superior skills (rather than luck). By contrast, women tend to attribute their success to outside factors (rather than solely their own skills). Other research shows that women tend to be less optimistic than men, and higher optimism leads to more aggressive risk taking.

But many scholars pin the blame on testosterone. John Coates, a former Goldman Sachs and Deutsche Bank trader turned neuroscientist, documents his stunning research on brain chemicals in his new book, The Hour Between Dog and Wolf: Risk Taking, Gut Feelings and the Biology of Boom and Bust. Coates and his colleagues at Cambridge University wired up a group of traders and monitored their blood as they went about their daily business. They found that two hormones, testosterone and cortisol, wrought havoc in the bloodstreams of the male traders, causing them to take outsized risks during market bubbles. Conversely, during market crashes (and huge losses), the traders became apathetic and excessively risk-averse. Coates' conclusion was that trading rooms would be well advised to hire more women and older men, both of whom ostensibly have less testosterone and cortisol coursing through their veins.

This risky business also extends to the mergers and acquisitions field. It turns out that women are better shoppers. A recent study found that for every ten-percent of female directors on the board of an acquiring company, the price paid (as a function of bid premium) was reduced by 13.3 percent. In addition, women board directors seem to go for smaller firms (less is more) and they consummate the deal more frequently. This is great news for companies who are on a shopping spree, since most acquisitions are wealth destroyers for shareholders of acquiring firms. And if you're wondering about that ten-percent figure...The average number of members on a corporate board is 9.2, of which 16.1 percent are women (that is, one-and-a-half women per board).

So, in this case, adding just one woman to the board could mean the difference between a really stupid purchase and a decent purchase. Better yet, add two women to the board and you might even avoid becoming the subject of an acerbic Wall Street Journal headline.

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