In the last few months, I have been thinking a lot about the potential causes of our global financial crisis. I have done my best to capture my thoughts in various entries in this blog as well as in seminars I recently gave at Imperial College and MIT. While doing research on the subject, I came across a few interesting, perhaps somewhat far-out articles that took my thinking in intriguing directions. Let me share some of them.
Gender diversity and the financial crisis
Is testosterone to blame for the financial crisis?, asks a Scientific American Science blog, as it writes: “High levels of testosterone are correlated with riskier financial behavior, new research suggests. Men with more of the sex hormone made riskier investments than guys with lower levels, according to a study published online yesterday in Evolution and Human Behavior.”
“They found that those traders with higher testosterone levels in the morning were most likely to make money on the day's trading. One trader hit a six-day "winning streak" during which he made more than double his daily profit. During that time his testosterone levels went up 74%. The team also found that cortisol levels among the traders increased when their takings became more volatile and the market generally was less stable.”
“. . . [John Coates, Senior Fellow at Cambridge University and leader of the study] believes the traders, who are almost all young men, were profoundly influenced by the testosterone hit they get from the job. But, he said, primeval brain mechanisms activated by the hormone can also lead them to irrational risk-taking. ‘I think this molecule is partly responsible for financial instability.’”
But why, you may ask, should high levels of testosterone lead traders to engage in potentially irrational, risk-taking? I found a rather simple, elegant answer to this question in an excellent article, Why we are, as we are in a recent issue of The Economist. The article applies Darwinian thinking to explore why money, status and hierarchy continues to matter so much to us humans. It said,
“For a Darwinian, life is about two things: survival and reproduction. Of the two, the second is the more significant. To put it crudely, the only Darwinian point of survival is reproduction. As a consequence, much of daily existence is about showing off, subtly or starkly, in ways that attract members of the opposite sex and intimidate those of the same sex.”
The article then observes that “A high-status man will get more opportunities to mate,” and “Since status is a moving target, there is no such thing as enough money.” Thus, testosterone, one of whose primary evolutionary purpose is reproduction, leads traders, most of whom are young males, to want to make ever larger amounts of money, which will then help them attract more potential mates. It all neatly hangs together.
These research results lead to some interesting questions, such as, for example, in this article in BusinessWeek.
“Too Much Testosterone on Wall Street? New research bolsters the idea that men are aggressive - and sometimes irresponsible - risk-takers, while women are responsible and risk-adverse . . . If women had been running our banks, might we have avoided the sub-prime mess and the resulting economic meltdown?”
Is there any merit to these discussions of gender-based differences in behavior among traders or in other professions? Should we raise such questions even though they are often highly charged and fraught with political correctness perils?
Women in science, engineering and math
Remember, for example, the uproar caused by then Harvard University president Larry Summers in January of 2005 when he asked whether innate differences between men and women might be one reason that fewer women succeed in high-end science and math careers. He raised three hypotheses as potential explanations for the different rates of success in such careers:
“that more men than women were willing to make the commitment in terms of time and flexibility demanded by high-powered jobs, that there were differences in the intrinsic abilities of men and women (more specifically, men's higher variance in aptitude, abilities or preferences relevant to science and engineering), and that the discrepancy was due to discrimination or socialization.”
Dr. Summers made these remarks at a small, private, invitation-only Conference on Diversifying the Science & Engineering Workforce, where he was asked to be controversial in exploring the dearth of female professors in science and engineering at elite universities. But his comments so offended a number of women attending the conference that they walked out and made his remarks public, leading to a huge response in the national news media and in academic circles. The controversy was one of the key reasons that led Dr. Summers to resign as Harvard president in June of 2006.
In retrospect, the furor resulting from Dr. Summers remarks had the pre-ordained inevitability of Greek Tragedy. Few would argue that serious academic discussions should shy away from exploring an important subject merely because it is controversial. However, when dealing with the past or present discrimination that a group faces, you have to tread very carefully, especially if you are not a member of that group.
Essential differences between the male and female brain
Perhaps the best work I have come across in understanding gender-based behavioral differences is being done by Simon Baron-Cohen, Professor of Developmental Psychopathology and Director of the Autism Research Center at the University of Cambridge. As part of his research into the causes and treatment of autism, Professor Baron-Cohen has been investigating why autism spectrum disorders occur far more frequently in males than females. Since my own son suffers from autism, this large gender difference is something I have personally observed through the years.
To help him gain insights into the mystery of autism, Baron-Cohen has been asking whether there are essential differences between the male and female brain. His research has led him to the theory that “the female brain is predominantly hard-wired for empathy, and that the male brain is predominantly hard-wired for understanding and building systems. I call it the empathising-systemising (E-S) theory.”
He believes that “people with autism may have an extreme of the male brain - good at systemising, very bad at empathising - and that studying autism with E-S theory in mind, can help increase our understanding of the condition.” In 2003 he published a book on the subject, “The Essential Difference: The Truth about the Male and Female Brain”.
An outline of his theory can be found in this New York Times OpEd from August, 2005, where he writes:
“In my work I have summarized these differences by saying that males on average have a stronger drive to systemize, and females to empathize. Systemizing involves identifying the laws that govern how a system works. Once you know the laws, you can control the system or predict its behavior. Empathizing, on the other hand, involves recognizing what another person may be feeling or thinking, and responding to those feelings with an appropriate emotion of one's own.”
“Our research team in Cambridge administered questionnaires on which men and women could report their level of interest in these two aspects of the world - one involving systems, the other involving other people's feelings. Three types of people were revealed through our study: one for whom empathy is stronger than systemizing (Type E brains); another for whom systemizing is stronger than empathy (Type S brains); and a third for whom empathy and systemizing are equally strong (Type B brains). As one might predict, more women (44 percent) have Type E brains than men (17 percent), while more men have Type S brains (54 percent) than women (17 percent).”
“Should a theory like this be a cause of concern?,” he asks in this other article. “Some people may worry that this is suggesting one sex is better than the other, but a moment's reflection should allay this fear. The theory is saying that, on average, males and females differ in what they are drawn to and what they find easy, but that both sexes have their strengths and their weaknesses. Neither sex is superior overall.”
Whether in biology, business or academia, a diversity of behaviors and skills is important for the health of a group, especially a group that is tackling highly complex problems in a fast changing environment.
I strongly believe that our financial systems would be significantly more robust if we had more women at all levels, from trading desks to senior executive position. Perhaps the higher levels of empathy that women generally have would have counter-balanced some of the extreme behaviors that contributed to the financial crisis.
I also worry that certain academic fields may have become so esoteric and abstract that it is hard for those outside their small inner circles to understand what the work is all about. Perhaps these disciplines are doing an outstanding job within the narrow and deep problems they have chosen to pursue, but I wonder if they might be missing other important but different problems that would have been explored if the discipline enjoyed more diversity.
I think that companies, professions or academic disciplines that are lacking in diversity could face a troubling future. Biodiversity is often used as a measure of the health of biological systems. Similarly, diversity in people and views should be viewed as a measure of the health of an organizational system. Diversity increases the robustness of the organization, making it more flexible and adaptable to change, and better able to cope with stresses and cataclysmic events.
Given our increasingly complex and fast changing world, diversity is more important than ever in order to insure that society and all its various groups and institutions are better able to survive and thrive well into the future.