Want to Reduce Risk? Hire Women, Older Men For Trading Floor
September 21, 2009
Financial markets might suffer fewer peaks and valleys if employers on trading floors hired more middle-aged men and women.
Sound farfetched? It probably is, but that's one conclusion of a University of Cambridge researcher in the U.K. who has linked success in risky trading markets to high levels of testosterone. The manly steroid diminishes in men as they age and is present in women in low levels.
John M. Coates, a research fellow at Cambridge and a former Wall Street trader, has led two studies examining the power of hormones in financial markets. He is planning two more papers this Fall on the topic of the trader performance funded by a grant from The Economic and Social Research Council in the U.K., but declined to elaborate.
And a brand new study of MBA students by the University of Chicago and Northwestern University looking at testosterone in business found that women tend to pursue more risk-averse careers. "These results suggest that testosterone has both organizational and activational effects on risk-sensitive financial decisions and long-term career choices," according to a summary published Aug. 24 in the Proceedings of the National Academy of Sciences.
Which is good news for both older men and women. "Banks have a habit of taking older men out of risk-taking roles. That might be a mistake," says Coates. Also, "if there were more women in trading markets, I don't think the swings in markets would go as far they do. They have very different hormones."
Coates first study, published in April, 2008 in the Proceedings of the National Academy of Sciences, examined 17 traders ages 18-38 on a trading floor in London. At 11 a.m. and 4 p.m. over eight business days, Coates and his team took saliva samples to determine if high levels of testosterone were present.
Coates and his associates also looked for cortisol, a stress steroid produced in the adrenal gland which is generated during periods of financial uncertainty. Cortisol rises as a man ages.
"We found when traders have high testosterone in the morning, they made a lot more money that afternoon," says Coates. "Their cortisol went up when there was a variance in their profit and loss, causing them to be more risk averse. That's what caused the credit crisis."
A second related study by Coates last year found that the ultimate financial risk takers, high frequency traders, often had a longer ring finger than index finger which is atypical of the population. The same condition has also been found and studied in top athletes.
"High frequency traders are like tennis players at the net. It's high risk and very fast. They're in and out in a minute, spotting price anomalies, holding positions for 30 seconds and up to two minutes," he says. "Testosterone may be increasing the speed of the transaction and the risk they are willing to take. They are not like analysts who analyze."
The longer ring finger scientifically known as low 2D:4D (2D is the index digit. 4D is the the ring digit) finder indicates a high level of prenatal androgen in the womb. Testosterone is an androgenic steroid, which acts as a male sex hormone.
