Was the Financial Crisis Caused by Hormones?

[question everything]

August 24, 2009

Was the Financial Crisis Caused by Hormones?
WSJ

Forget whether fat bonuses or the lack of regulation encouraged undue risk taking during the credit-fueled boom. It seems risk may run in Wall Street’s blood. The evidence? A recent study from researchers at business schools at Northwestern and the University of Chicago concludes that testosterone levels play a big role in a person’s proclivity to take financial risks. The study, being published today in the academic journal Proceedings of the National Academy of Sciences, concludes that biology– not just society or culture –drives individuals to pursue financially riskier careers and make riskier decisions.

In the study, researchers analyzed the saliva of 500 MBA students at U-Chicago’s Booth School of Business and put the students through certain games. They determined that men, who typically have higher levels of testosterone, were willing to take greater risks than women. It isn’t all that surprising to hear that men take more risks: Just look all the male executives who loaded up on subprime mortgages or who bulked up the risk on auction-rate securities, bringing that market briefly to a halt, or even the male participants in the MTV program “Jackass,” who are willing to take risky and physically painful stunts. And the postscripts of such failed Wall Street’s firms as Lehman Brothers Holdings and Bear Stearns depict a clear macho culture pervading the corner offices.

Interestingly, the researchers found that female students with higher testosterone levels also were willing to take more risks... The study found that 36% of the female M.B.A. students chose high-risk financial careers such as investment banking or trading, compared with 57% of the men. Does that mean the hormones, not gender bias , is behind the male dominated composition on Wall Street.

There are some caveats. Sapienza acknowledges the finding don’t take into account the social decisions that go into hiring. Much of the study’s findings were based on a game. The students had to choose whether to take a guaranteed payment or play a lottery that promised higher and higher payouts. The students with higher testosterone bet the house. And the study was conducted in October 2006, at the height of the credit boom, when risk was in (So it seems possible the outcomes would be different now, what with our real-world evidence that excessive financial risk-taking really can threaten the foundations of the world economy.)

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http://blogs.wsj.com/deals/2009/08/24/was-the-financial-crisis-caused-by-hormones/