What If Women Ran Wall Street?

Photo: Lori Nix

Early in the morning on a typical weekday, men can be seen resolutely streaming down lower Broadway, braced against a pulverizing wind. They are preparing to enter their office buildings, put on their headsets, flick on their Bloombergs, and go to war. And if they look miserable—or weary, frustrated, angry, or petrified—it’s because they have one of the most emotionally taxing jobs in the world. Playing the market is a constant ricochet between panic and euphoria. There’s a reason the burnout rate is high. But the formula for succeeding in a high-stress financial environment is simpler than you might think. If you ask a trader, or someone who studies them, what the single most important factor is in determining whether a person will be good at trading, they will say that it’s the ability to control one’s emotions.

The trouble for all those men pouring into the trading desks is that recent studies suggest purely rational behavior may not come as naturally to them as gender stereotypes would suggest. A couple of weeks ago, for instance, the investment-management company Vanguard released data showing that men were more likely than women to sell stocks at the bottom of the market. Could it be that the fairer sex is better able to ride the ups and downs of Wall Street without letting their emotions get in the way?

“There were always very few women on the floor of the exchanges,” says a hedge-fund manager named Henry Lee, who spent years on the floor of the American Stock Exchange. “But the women who were successful at it were unbelievable.”

Lee is sitting at a trading desk with his friend Harley Evans, a derivatives trader at a firm called Mako Financial Markets, talking about gender differences in their line of work. “They never got ruffled, never got upset,” Lee continues. “Losing their temper? Never.

“I think women can be very emotional, too,” Evans says, not entirely convinced.

“Women respond to stress differently,” Lee says. Rather than throwing the phone across the room, “women cry.”

“Well, I’ve cried, too,” Evans says.

“Not that I’ve seen. You cried alone in your closet,” says Lee.

“I cried in my beer.”

“The notion of taking chances is definitely more male,” Lee says. “Look, men are much more willing to take a shot on something with incomplete knowledge.”

So, I ask, how would Wall Street be different if there were more women making decisions? Lee offers an analogy based on the fact that he’s going through a divorce: “I would say that when you’re married, your life is much more level,” he says. “And when you’re single, you tend to experience many more swings. For example, you might not go skydiving if you’re married, or go out drinking all night with your buddies, or you may not pursue that Ironman.” Having women around, in other words, “prevents extreme behavior—or irrational exuberance.”

Despite what we’ve been led to believe, the market isn’t rational or efficient at all—it’s all about feelings. The major plot points of the crisis largely turned on emotion: Dick Fuld was too egotistical to sell Lehman Brothers when he had the chance, so his pride drove it into the ground; Bear Stearns hedge-fund managers lost huge sums of money on subprime mortgages despite the fact that they suspected the worst (“I’m fearful of these markets,” Ralph Cioffi e-mailed a colleague back in 2007); Merrill Lynch was the “fat kid,” as the investor Steve Eisman has put it, so desperate to be like Goldman Sachs that it barreled into every dumb investment imaginable and had to be bailed out by Bank of America. Almost every single bank chief doubled down on mortgage junk at exactly the wrong moment. Emotions led otherwise intelligent men—because, let’s face it, all of them were men—to make terrible decisions.

According to a new breed of researchers from the field of behavioral finance, Wall Street’s volatility is really driven by our body chemistry. It’s the chemicals pulsing through traders’ veins that propel them to place insane bets and enable bank executives to make risky decisions—and those same chemicals tend to have the same effect on everyone, turning them into a herd of overheated animals. And because the vast majority of these traders and finance executives are men, the most important chemical in question is testosterone.

Here are a few things we know about testosterone: Both men and women produce it, but men make fifteen times as much of it as women, on average. It causes all sorts of physical differences—in body hair, muscle mass, jawlines, and so on. Behaviorally, it does all the things that one would expect: It is linked to increased aggression and dominance, confidence, hostility, violence, sensation-seeking, and the searching out of mates (“I felt like I had to have sex once a day or I would die,” Drew—formerly Susan—Seidman told The Village Voice, after having testosterone injections as part of his transformation from a woman to a man). One of the most fascinating things about testosterone is the way it can be influenced by the environment. A man who stays home with his kids, for example, is likely to see his testosterone level drop over time. Testosterone varies throughout the day, peaking in the morning and gradually ebbing through the afternoon. Perhaps not surprisingly, single men have higher levels than married men. If you eat more meat, it tends to be higher. As it does when a man is in the presence of an attractive woman, or looking at the Sports Illustrated swimsuit issue. Or in a highly competitive environment with other guys, like a rugby game—or the Bear Stearns trading floor.

Photo: Lori Nix

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.”

For better or worse, the women traders I spoke with tended to classify themselves as more conservative than their male counterparts. A self-described math nerd, Nancy Davis was head of Goldman Sachs’ proprietary derivatives-trading desk for five years. “I think generally, women are more likely to admit that they’re wrong, faster. I think there’s less ego for whatever reason with women traders, the ones I know at least,” she says. She made a habit of keeping her boss in the loop on every trade—something she calls having “buy-in.” “If there’s a position going sour on me, I’m not going to sit and say, ‘I know what’s best.’ It would make me want to raise my hand and get advice from other people. It’s like asking for directions when driving.”

A former boss of mine—a hedge-fund manager named Nancy—once barked out one of the most useful pieces of stock-buying advice I’ve ever heard. One of her consultants had amassed in his personal account a huge position in a tech company, Rambus, having ridden it from something like $10 a share to well above $100. It was the height of the Internet boom, and the normally self-effacing geek was strutting around the office, dizzy with future plans for his nest egg. Nancy would peer at him over her monitors, egg-salad sandwich in hand, and say, “Sell half.” It was the sort of conservative strategy she tended to practice herself—and of course it is an investment strategy that many men practice as well. But sadly her tech consultant wasn’t one of them. He was certain that the thing would keep going higher, and the thought of missing out on it made him crazy. Months later, when Rambus tanked, he rode it all the way back down.

John Coates, a senior research fellow in neuroscience and finance at the University of Cambridge, studies just this sort of magical thinking. During the IPO heyday of the late nineties, before he became a full-time scientist, Coates was running a trading desk at Deutsche Bank. “Male traders were acting odd during the bubble,” he recalls. “They were displaying what we call clinical symptoms of mania. They were delusional, euphoric, overconfident, had racing thoughts, a diminished need for sleep.” One of his colleagues—a “kid” with a general-arts degree and $500,000-a-year salary—quit his job to start a nebulous Internet company. “I asked him what the Internet company would do, and he said he didn’t know yet,” Coates says. Meanwhile, the few women on the desk seemed mostly unaffected by the frenzy. “The guys had their eyes rolling back in their heads, desperate to get involved in what some genius was up to, and the women just didn’t buy into it.”

“The banking crisis was caused by doing what nosociety ever allows: permitting young males to behave in an unregulated way. Anyone who studied neurobiology would have predicted disaster.”

Positioning himself as a sort of endocrine whisperer of the financial system, Coates argues that if women made up 50 percent of the financial world, “I don’t think you’d see the volatile swings that we’re seeing.” Bubbles, he believes, may be “a male phenomenon.”

His colleague, neuroscientist Joe Herbert, agrees. “The banking crisis was caused by doing what no society ever allows, permitting young males to behave in an unregulated way,” he says. “Anyone who studied neurobiology would have predicted disaster.”

At Cambridge, Coates and Herbert launched a study of the way testosterone and cortisol—which is released by the body in response to stress—rose and fell in a group of traders in London as they worked the markets. Testosterone surged in traders who were experiencing winning streaks, leading to a greater sense of confidence and a higher propensity for taking risks. This improved the trader’s chances of winning again, in a kind of positive-feedback loop. At some point, though, the effect of the testosterone became toxic, and traders made decisions that were self-defeating, almost stupid. Cortisol, the stress hormone, behaved differently, shooting up with the volatility of the market. When the market started to crash, cortisol spiked as well, possibly exaggerating the sell-off.

When Coates first suggested that men on trading floors might be at the mercy of a swirling cocktail of hormones, he expected traders to be offended. “But every trader knows, when you’re on a winning streak you act like a dickhead, and then you end up giving back all the money you made on the way up,” he says. “I actually got a lot of e-mails from traders saying it was good to know where this odd behavior comes from.”

Dug Hirschhorn, a well-built fellow with a shiny bald head and feline features, bills himself as a “peak performance coach” to Wall Street traders. He tries to teach men to make better decisions and to avoid destructive habits, such as becoming too emotional about their positions or not knowing when to cut their losses and sell. “I literally have to deconstruct a lot of their testosterone,” Hirschhorn says. “A lot of behaviors that are counterproductive to success in trading are typical male traits, such as being too aggressive, too stubborn, or being ego driven.”

Today, Hirschhorn is working with a portfolio manager who is responsible for trading about $100 million, a fellow whom we’ll call “Ken” because he’s embarrassed to use his real name. Ken is blond and trim, and wears snug-fitting jeans and a watch that looks like it weighs about eight pounds. His forearms are muscled and tan. He sees himself as akin to a professional athlete, a money-producing machine in need of constant tweaking to operate at its optimal level. Hirschhorn is the guy who gives him a rub and a squirt of water when he takes a break from being pounded in the ring.

“Look, I’m good, but I’m inefficient about how I spend my time,” Ken says. “I’m here to try to get better.” He proceeds to vent about various things: the slightly co-dependent, old-married-couple-sounding relationship he has with the trader who works for him, and a fraught investment they made in a finance company that’s in trouble and may be rescued by the government. “It’s so fucking small, it’s almost aggravating to me,” Ken says about the position. “I know we’re going to end up losing money on it.”

“By having you journal every day, are you noticing that you’re more intentional with how you spend your time?” Hirschhorn asks. (I keep expecting one of them to break out laughing, but it doesn’t happen—they are dead serious.) Ken says he doesn’t want to admit to people that he’s writing everything he does down in a notebook, but Hirschhorn thinks it’s an important step in becoming more conscious of his actions, and less likely to get swept up in his emotions. Earlier in his career, Ken says he was consumed by competitiveness, his decisions driven by a desire to beat the guy beside him. “I wanted to not only get money, but I wanted to get style points,” he says. Now, he continues, “who gives a fuck? It might make me right, but it doesn’t make me a good portfolio manager.”

“This guy is very self-aware,” Hirschhorn tells me later. “Usually, it’s a guy who played football at Notre Dame, who drinks beers and plays sports.”

If journaling seems like a long way to go for a trader to get in touch with his feminine side, it’s not the most extreme example. In a bizarre piece of finance history that has entered the realm of lore, a junior trader at the Greenwich-based hedge fund SAC Capital filed a sexual-harassment suit in 2007 against his boss, alleging that he ordered him to take female hormone pills to soften his demeanor and improve his trading. The story is wacky, to be sure, but it wasn’t entirely shocking to Hirschhorn. “I don’t think greed is gender specific,” he says. “But if you ask me whether Long-Term Capital Management would have blown up if there were more women involved in the decision-making process? A woman might have said, ‘Let’s not assume we’ll never be wrong.’ ”

While he was working on his Ph.D. in sports psychology, Hirschhorn got an offer to join what was then one of the largest proprietary trading firms in the country—with 1,200 traders, many of them former sports players—and help them improve their trading. “What was most interesting to me, was that out of the twenty women who were there, five of them were tremendously successful, so the ratio of success for the women was 25 percent, whereas it was maybe 2 percent for the men,” he says. He found that it was easier to teach women when to be more aggressive than it was to lessen the overaggression of the males.

“I’ve always kept it in the back of my mind,” he continues. “I always thought it was the overlooked aspect of Wall Street—there are very few women in high positions.”

Hirschhorn is peddling his ideas about gender and risk to a number of investment banks. “They could hire twenty elite women and mentor and develop them to become super-traders,” he says. So far, he’s had few takers. “Their philosophy is hire 1,000 men, and if three become rock stars, that pays for the whole model.”

It’s perhaps not surprising that one of the first experiments in all-estrogen asset management is happening in a place with nothing left to lose. From her perch as director of Iceland’s Chamber of Commerce, Halla Tómasdóttir watched with concern as the global debt bubble grew and grew. In 2007, she decided to start her own investment company with another woman. “We wanted to put more feminine values into finance,” says Tómasdóttir, now the chairman of Audur Capital. “The financial sector was created by men, 99 percent of the employees are men. It was like herd behavior: They all think the same, they’re all from the same school, with the same friends, the same jargon, the same books. You get very unbalanced as a consequence.”

While the Icelandic economy was decimated after a multiyear binge of borrowing and investing in real estate and other assets that plummeted in value, Audur Capital has turned a modest profit since it launched. The company philosophy: Only invest in things its managers can explain and understand. “It doesn’t make much sense to us to invest in something and try to make 30 percent in one year, only to lose 60 percent the next year,” Tómasdóttir says. Of course, to some, turning a modest profit is nothing to get excited about. “If you are a cowboy investor,” she admits, “we are probably not your place of choice.”

Tómasdóttir has conducted some academic research of her own. In 2004, she embarked on a doctorate, which she never finished. The working name for her thesis was “The Great Big Penis Competition: The Story of Mergers and Acquisitions in Iceland.” She explains: “The reason I called it that was—and I don’t want to be vulgar—but the kind of behaviors you have seen, have to be best described as a territorial pissing contest. It’s always been about who’s the biggest, who owns more, who’s the first on the richest-people list.”

Of course, not even the author of “The Great Big Penis Competition” would argue that all men are aggressive, egotistical, and stubborn—or that all women are conservative, rational, and levelheaded. And being reductionist about hormones and gender is a sure way to misjudge a complicated individual.

When I was talking to Sheila Bair, the chairman of the FDIC, about the testosterone research and its implications for the financial markets, the two men sitting in on our interview—Andrew Gray, her press director, and Jesse Villarreal, her chief of staff—burst out with horrified laughter, as if it were the most absurd thing they’ve ever heard. Bair responded more carefully. “With some of those academic studies, I can see what they’re saying, and I think there may be some truth to that, with the caveat that you should never categorize people,” she said. “Perhaps from a risk-management standpoint, having diversity and different perspectives and attitudes is helpful.”

While Bair is regarded in some circles as a prudent, risk-averse regulator who helped save the banking system, she’s made quite a few enemies along the way. She’s publicly feuded with Citigroup CEO Vikram Pandit, even pushing for a shake-up in Citi’s management. Meanwhile, Treasury Secretary Timothy Geithner has reportedly fought to push Bair out of her job.

Sitting in her carpeted Washington, D.C., offices, I ask Bair if she thinks she’s outspoken. “Am I outspoken?” she asks, laughing nervously. “I would say I’m direct.”

But don’t let her feminine nervous laughter fool you. “She was very aggressive, both in public and in private,” says a former Treasury official under Paulson. “And, you know, it had nothing to do with her gender.”

What If Women Ran Wall Street?