Anna Dreber, an economics researcher at Harvard’s Kennedy School, started studying testosterone as a possible explanation for why there tend to be few women in certain fields—math, say, or kickboxing, Dreber’s sport of choice. Through studies conducted at the Harvard biological-anthropology department, Dreber found that appetite for risk in simulated investment games correlated with high testosterone levels and with facial characteristics such as sharp cheekbones and strong jaws that are normally associated with the hormone. “There is a clear sign that something biological explains risk taking,” she says. Testosterone is not the only chemical that affects it—the stress hormone cortisol has a role, as well as the neurotransmitter dopamine, among others—but it’s by far the most powerful.
Dreber has been thinking about the issue a lot recently, especially after reading the reports about AIG’s London office, a hothouse where a small group of men almost brought down the world economy. “When you have this place with all these male traders taking enormous risk,” she says, “I can imagine that being in a very competitive environment with lots of other competitive males makes the testosterone go up, which leads to even more risk.” Another study Dreber has in the works will look at the effects of the hormones in the birth-control pill on women, because women having their periods have been shown to act more like men in terms of risk-taking behavior. “When I present that in seminars, I say men are like women menstruating,” she says, laughing.
Dreber is not the only one to see human behavior on Wall Street in such starkly biological terms. To Terry Burnham, economist and author of Mean Markets and Lizard Brains: How to Profit From the New Science of Irrationality, modern finance is a jungle where apes are strutting around, puffing out their chests and stealing each other’s women and bananas. Burnham’s metatheory is that human beings haven’t evolved nearly as rapidly as their environment has since the Stone Age. One could argue that technology—the ability to make enormous trades in the blink of an eye with supersonic computers—only exaggerates the primal, emotional element, allowing people to respond in a flash to their biochemical urges. The better the machines the more our animal instincts take over. “The caricature view would be, the caveman wins the battle, has more babies, crushes his enemies, then puts on a suit 10,000 years later and goes into a boardroom and still wants to crush his enemies,” Burnham says.
Burnham wanted to understand self-defeating behaviors in the business world, such as why good companies pay billions of dollars to buy crappy companies (Time Warner-AOL), or why a male friend of mine who shall remain nameless doubled down on Citigroup shares at $50. In a study conducted at Harvard, Burnham found that higher-testosterone men were more likely to reject money that was offered to them if someone else was getting a larger share. A similar study at the University of British Columbia looked at the question through the lens of mergers and acquisitions, the primal psychodrama of corporate America. The authors found that the younger a CEO was, and therefore the higher his testosterone level (and the lesser his experience), the more likely he was to walk away from merger negotiations, even when the deal was in the company’s best interest.
“Having too many men involved in business might cause them to take more risks, and having more women would probably be good in lots of settings,” Burnham says. “Women are the brake pedal.”
Last year at Davos, a spontaneous (and slightly goofy) discussion broke out about whether Lehman Brothers would have failed if the company had been called Lehman Sisters. (They might have forgotten that there was at least one sister, Erin Callan, but she had only just become CFO when things fell apart.) The conclusion was that Lehman would probably still be in business, although it also would have made less money during the boom years.
That’s the thing about Wall Street: Until the crash, no one wanted to hire traders of either gender who didn’t have a large appetite for risk. In that model, the lows might have been very, very low, but the highs were astronomical: For every Brian Hunter, the rogue trader from the hedge fund Amaranth Advisors, which lost $6.6 billion largely because of his bets on the natural-gas market, you have an Andrew Hall, the Phibro trader who was owed a $100 million bonus after his unit made $2 billion for Citigroup over the last five years.
Terri Duhon, now a consultant in London, worked as an interest-rate swaps trader at JPMorgan before joining the group that invented credit derivatives. Duhon says that she is considered quite aggressive—for a woman—but when she started trading on the swaps desk in the nineties, she discovered she was not comfortable with the type of risk-taking involved. She recalled a day when she made a very risky trade and was worried about it, and realized there were other traders who took a more cavalier attitude toward the possibility of losing big. After all, many traders who blow up manage to resurrect themselves. “Someone said to me, ‘If he can lose a lot of money, it means he can take the risk to make a lot of money. He has the balls to do it,’ ” Duhon says. She had never heard anyone articulate the “testicles” explanation quite so explicitly before. “It’s what some banks do. They put these young guys in there who are prepared to take the risk.”