(This column, which explored whether a gender bias in the world of finance could have contributed to the Global Financial Crisis of 2008, was published in DNA edition dated March 18, 2009.)
One of the less analysed aspects of the current global financial meltdown is the gender dimension as a contributory factor to the mess. In large part, the crisis came about because Wall Street bankers – a community with a gender distribution that’s heavily skewed in favour of men – took excessive risks with lending and investment practices. Like boys playing with their toys, they conjured up fanciful financial products that nobody outside of their charmed circle could fathom. And having created an illusion of wealth-making, they parcelled out the risk to others who wanted a piece of the action, and walked away with their million-dollar bonuses.
It’s possible to argue, of course, that women in similar positions would have behaved exactly the say way as men. After all, in the world of politics, Margaret Thatcher and, nearer home, Indira Gandhi, Jayalalitha and Mayawati haven’t exactly made a compelling case for the merits of having women in positions of power by, for instance, providing better – or more “caring” – governance.
When it comes to the world of investments, however, women typically tend to be rather more passive than men. Surveys by leading financial houses have established that more women than men think of investing as highly complicated, and that more women than men feel they are ill-equipped to make investment decisions. Again, many more women than men admit to being ‘intimidated’ by numbers – and an inability to demystify the jargon that characterises the marketing of structured financial products.
On the face of it, these findings would appear to square with many gender profiles of investors. After all, far fewer women than men invest in financial products or in the stock market. And far fewer women than men make it to the top of the heap in the Darwinian world of finance: the Naina Lal Kidwais and the Shikha Sharmas and the Chanda Kochhars of the world are still, sadly, only notable exceptions.
But these gender-based ‘investor confidence’ surveys hide a fallacy. The fact that fewer men than women admit to feelings of inadequacy in making investment decisions does not, in itself, mean that men are in fact better with their finances. It may mean – and this has been empirically established as being true – that men tend to overestimate their capability to make complex investment decisions, and that women, on the other hand, are more realistic.
When it comes to stock market investments, in particular, such overconfidence tends to influence returns negatively. Financial gurus Brad Barber and Terrance Odean have done some pioneering research work to determine how psychologically motivated decisions affect investor welfare and the prices of securities. In a research paper titled ‘Boys Will Be Boys: Gender, Overconfidence and Common Stock Investments’, they established that men – who tend to be more overconfident than women in areas such as finance – traded much more actively than women. This increased their transaction costs – such as on brokerage and tax on short-term capital gains – and lowered their effective returns. Women, on balance, tended to get higher returns because they traded less.
Barber and Odean also concluded that there was considerable evidence that men and women have different attitudes towards risk; specifically, women tend to hold less risky positions than men with their stock portfolios. Equally interesting, their study confirmed the common-sense notion that the young and wealthy with no dependants embraced greater risk. In sum, Barber’s and Odean’s advice: “Before you trade, consult your wife!”
Based on this study, it seems self-evident that the world of finance should have fewer young, bachelor men on the trading floor – the sort of profile that now characterises that universe – and more married women, preferably from the middle/upper-middle class. That’s not a call for affirmative action: it’s just a practical strategy to save the world of finance from being wrecked by offering more ‘jobs for the boys’.