As a trader on Wall Street during the dotcom bubble of the late 1990s, John Coates watched in fascination the way his male colleagues reacted to the rising share prices. Men who were normally prudent became euphoric and reckless, taking on too much risk, while women traders were largely unaffected.
Although Coates was a relatively cautious trader, he recognised from his previous experience the powerful high that comes from a long-term winning streak. He suspected that testosterone was building up in traders’ bodies, making them feel infallible and pushing up market values to unsustainable heights. He felt sure that body chemistry was at the root of market bubbles.
A few years later Coates had the opportunity to test his theory when he returned to his old university, Cambridge, to study neuroscience and endocrinology. He and a fellow researcher, Joe Herbert, carried out tests on the trading floor of a major London investment bank. Each day they took saliva samples from traders’ mouths just before and after the day’s trading and measured the levels of steroid hormones.
They found that traders performed better on days when they registered higher morning levels of testosterone. By increasing confidence and risk appetite, testosterone made them more likely to win and each time they did, their levels would rise even higher. However this ‘winner effect’ had a dangerous conclusion, as eventually traders became so overconfident that they began to take irrational risks. Similar behaviour can be observed in animals – they pick fights, neglect their offspring and go out in the open too often.
By contrast, when markets crashed or became volatile, traders registered rising levels of the stress hormone cortisol, creating feelings of paranoia and irrational pessimism and making them risk averse – the perfect ingredients for a bear market.
The work by Coates and Herbert was timely, coming in 2008 just a few months before the collapse of Lehman Brothers and the onset of the GFC. Finance is renowned as an industry heavily dominated by males. In early 2008, women managed just 3 per cent of the US$1.9 trillion invested in hedge funds. As the regulators and the wider financial community looked for explanations as to why the crisis happened, many were asking the question: Would it have made a difference if there were more women in charge?
Christine Lagarde, managing director of the International Monetary Fund, was one of those who joined in the debate. In 2010, she joked that if Lehman Brothers had been Lehman Sisters, the crisis might have looked very different. “I wish that there were more women in finance – I think it would be much healthier,” she told one interviewer. “We don’t know if it would have been different with more women but my intuition tells me it possibly might have been.”
Coates and Herbert were not the first to highlight gender differences in investing. In Boys will be Boys, a study published in 2001, Brad Barber and Terrance Odean looked at the differences in the investment decisions of men and women. They found that single women outperformed single men by 1.44 per cent, because men traded more and therefore paid more commission. This ‘overtrading’ was taken as a sign that men were overconfident and felt they could beat the market.
A study of 2.7 million US investors by the US fund company Vanguard showed that during the financial crisis of 2008 and 2009, men were more likely to trade and to sell shares at stock market lows. “There’s been a lot of academic research suggesting that men think they know what they’re doing, even when they really don’t know what they’re doing,” said John Ameriks, a co-author of the study. He said women were more likely to acknowledge that they didn’t know something, such as the direction of the market.
Figures from the Chicago-based Hedge Fund Research produced in 2009 revealed that funds run by women fell only half as much during the financial crisis and, over the previous nine years, had significantly outperformed those run by men. John Coates believes that market bubbles could be a young male phenomenon and believes that in the wake of the GFC, greater diversity is required in finance – not just in terms of attracting more women but also older males.
“The financial world desperately needs more long-term, strategic thinking, and the data indicates that women excel at this. As banks, hedge funds and asset-management companies assess their current needs and more data emerges on the performance of women risk takers, the financial institutions will come, I believe, to hire more and more women.”
According to the Equal Opportunity for Women in the Workplace Agency (EOWA), women account for 56 per cent of employees in the finance industry overall in Australia. However the number in senior roles is still very low. In 2012, women accounted for just 12.3 per cent of key management positions in banks in the ASX 200. Each of the big four banks has announced targets to increase the number of women in management. Data is harder to find for investment banks but it is likely that the numbers would be smaller still.
One barrier to increasing the number of women in finance may be finding, and retaining, the right candidates. Carolyn Neck, a PhD student at UQ Business School, recalls: “As a head hunter seeking candidates for senior positions in finance, I was regularly asked, ‘Where are all the senior women? We want to hire more but we can’t find any.’
“Having worked in investment banking and been involved with various other areas of the finance industry for many years, I have seen many women choose to leave once they reach senior levels…at a stage where presumably the benefits of all their hard work start to kick in.”
Carolyn decided to research the subject and interviewed dozens of women who had left senior jobs in finance. In every case the woman had some frustration with the job – in investment banking this was typically the ‘boys’ club’ atmosphere, the long hours culture and lack of flexibility, while in banking it was lack of career opportunities. However frustration alone was rarely enough to trigger their departure – there was generally also a personal factor driving a desire for change. Choice also played a part – as highly skilled women, and often financially secure, they were well placed to find another job or even give up work altogether.
Results from a subsequent survey across a broader sample of women who had left senior roles in finance supported these findings. She suggests that investment banks should look at changing the culture and the need to be seen in the office, however further research is required. She adds: “If diversity is important and finance organisations are keen to increase their numbers of women in management, we need to understand more about why women leave.”