Reporter: Robert Smith Title: Bankers Behaving Badly? Module: final year Brain and Behaviour

1. Bankers Behaving Badly?
For many people, the collapse of Lehman Brothers in September 2008 marked the beginning of what has been the longest and deepest financial crisis in living memory. Much has been written about the causes of the economic downturn and how the bankers got it so spectacularly wrong. Was it all a logical consequence of unfettered avarice and feckless trading? Or was there a more fundamental basis for the crash - the predominance of male bankers "behaving badly" (Peston. 2009)? Would we have experienced the crash if the Sisters had been at Lehman's helm? Do men and women have different attitudes to risk- taking and if so, would the credit crunch have been avoided if there had been more women in our financial institutions? To answer that question, we turn, not to the world of economics but to biopsychology.
Trust me: I’m a banker.
Investment banks are complex organisations involved in, amongst other things, the trading of equities and derivatives to maximise profit by exploiting the differential between purchase and sale price. Bankers have to evaluate the uncertainty of the future returns that may be produced by an asset (Greenspan. 1999). It’s a risky business.
Given the high stakes, you might think that bankers would be involved in a cool, dispassionate assessment of an asset unencumbered by emotion and irrationality. Not so. The neuropsychologist Frank Coates has discovered that this assessment may be as much influenced by biological considerations as by the numerical evaluation of the asset itself (Coates et al. 2010)
If you’re choosing someone to look after your money, you might be interested in their financial acumen, academic qualifications and track record. But you should also be looking at

2. their gender. The simplest
biological distinction that
appears to make a
difference in financial risk
taking behaviour is
whether your banker is
male or female.
Women are generally
regarded as being more
risk averse than men
(Eckel and Grossman.
2002). This risk aversion
applies not only to
whether someone is more
or less likely to harbour a
desire to climb Mount
Everest or single-handedly
circumnavigate
the globe but also to
financial decision-making.
A study by Bernasek and
Shwiff (2001) found that
women financiers were
more cautious than men
when it came to
retirement investment
planning.
So why are men more
predisposed to making
financially riskier
decisions than women?
Research has shown that
the action of steroid
hormones and
neurological differences
between the sexes may
explain male risk taking
generally and be
implicated in the realm of
financial decision-making.
Is your banker on
steroids?
Steroid hormones are
naturally occurring in
both men and women but
are found in the
bloodstream in different
quantities. This
difference in levels of
steroid hormones such as
testosterone, cortisol and
oestradiol (Carlson. 2010)
might account for the
difference in risk taking
between men and women.
The finger of suspicion
has been pointed at
testosterone regulation as
being a primary candidate
for male and female risk
taking behaviour
(Apicella et al. 2008).
Testosterone is often
blamed for pub brawls
and aggressive male
driving but could it also
be responsible for the
financial crisis?
Testosterone causes not
only increased aggression
but also increased
confidence, reduced risk
aversion, shortened
reaction times and
increased vigilance
(Sapienza et al. 2009).
Testosterone can, of
course, change the
behaviour of both men
and women (Maxfield et
al. 2010) but since women
possess only 5 - 10% of
the levels of circulating
testosterone found in
males (Meier-Pesti and
Penz. 2008), would
women financiers be
equally susceptible to the
effects of testosterone as
their Show them you're a plutocrat male counterparts?

3. Would investing in Lehman Sisters have been a better bet?
Of course, we can only speculate but several academic studies suggest that women are more cautious when it comes to taking risks, so might have looked after your money somewhat better than their male counterparts. In one such study involving male and female participants in a financial trading scenario, Sapienza et al. (2009) found that the male participants were less risk averse than the women, with those men having the highest levels of circulating testosterone displaying the lowest aversion to financial risk. Another study investigated the effect of testosterone on male risk taking: 98 male Harvard University students were placed in a simulated investment scenario. The result demonstrated that those men with higher levels of circulating testosterone were more likely to make riskier financial decisions (Apicella et al. 2008). A third study involved traders on a London trading floor: saliva samples were taken twice a day to ascertain testosterone levels. Acute increases in testosterone resulted in higher profits, but chronically raised testosterone levels reduced profits (Coates and Herbert, 2008). The scientists speculated that chronically high levels of testosterone enhanced impulsivity and reduced rational decision-making.
And it gets worse. When one male perceives a challenge from another male, levels of testosterone increase in the blood stream, resulting in increased aggression (Archer, 2006). This doesn’t bode well for men working in the heady world of the stock market; male traders may perceive the competitive banking environment as one where they are constantly challenged by their peers (Deaves et al. 2008). Under the influence of increased testosterone flows, this perception can lead to increased aggression, higher self- confidence but also reductions in their ability to assess risk. This increased confidence can lead to what Barber and Odean (2001) termed the 'male syndrome' when male overconfidence leads to greater self belief in their investment decisions even when they are very uncertain or are more likely to be wrong.
So to ensure our future financial stability as a nation, should our financial institutions only employ women, those paragons of hormonal stability and financial rationality? Well, it’s not quite that simple. It has been shown that a women trader's oestrogen and progesterone levels are lower during menstruation, and so are less able to 'offset' the effects of testosterone. This means that a menstruating woman’s risk taking profile is similar to that of male traders (Chen et al. 2005; cited from Apicella et al. 2008, pg 388).
Is Testosterone the only culprit?
In addition to the activational effects of testosterone, it appears to have more insidious effects on the organisation and development of the prenatal and pubertal brain (Coates et al. 2009). It is the organisational effects of testosterone on the developing brain and the potential behavioural implications that are proving to be of

4. considerable interest to researchers. Recent studies have revealed that prenatal exposure to testosterone not only modifies the structure and function of the male brain (Sapienza et al. 2009) but it also appears to sensitize the developing brain to the effects of circulating testosterone that are manifest particularly after puberty (Breedlove and Hampson. 2002; cited in Coates et al. 2010. pg 336). How could this affect our bankers? Well, exposure to higher levels of prenatal testosterone has been implicated in increased competitiveness, aggression and sensation seeking in males (Hönekopp et al. 2006).
So how do we know if our bankers' brains have been forged in a testosterone rich prenatal environment? In a convenient but serendipitous coincidence the degree of prenatal testosterone exposure correlates well with the ratio of the length of the 2nd and 4th fingers (known as the 2D:4D ratio). Strangely this stems from the fact that finger development is influenced by the same genes (hoxa and hoxb genes) that also give rise to the formation of the penis (Kondo et al. 1997). Consequently males with a relatively longer 4th finger compared to their 2nd finger (a lower 2D:4D ratio) have been exposed to greater prenatal testosterone exposure (Hönekopp et al. 2006). As would be expected women tend to have a higher 2D:4D ratio than do men.
Employing this 2D:4D finger length differential has resulted in some interesting revelations. In one study involving a mixed group of 550 males and females participating in an investment scenario, high financial risk aversion was strongly correlated with a higher 2D:4D ratio, or in everyday parlance - the women (Sapienza et al. 2009). Similar findings were also discovered in a mixed sample of Swedish participants when again the possessors of the higher 2D:4D finger ratio - the women - were found to be far more risk averse (Dreber and Hoffman. 2007; cited in Apicella et al. 2008, pg 388).
So is testosterone to blame for the financial crisis?
So far the prosecution's evidence for testosterone being the principal factor in differences in male and female risk taking behaviour appears to be strong. But is it an open and shut case? Brain imaging techniques such as functional magnetic resonance imaging (fMRI), which 'measures' brain activity by comparing the magnetic 'signature' of oxygen rich and oxygen depleted blood, has revealed other possible culprits.
One scientific study has shown that a particular area of the brain - the nucleus accumbens – is active when financial gain is anticipated (Kuhnen and Knutson. 2005). When participants were presented with different investment choices, activation of the nucleus accumbens pre-empted financially risky decisions. This is interesting because the nucleus accumbens is also associated with so-called 'reward behaviours', including recreational drug use (Ikemoto and Panksepp. 1999). This raises the possibility that financial risk taking may

5. be addictive. But if this is the case why don't men and women display similar addictive traits? Here we come full circle to the action of testosterone, which in this case appears to encourage the transmission of the hormone dopamine in the nucleus accumbens (Coates et al. 2010). Dopamine heightens the rewarding feeling (Ikemoto and Panksepp. 1999) so could it be that women, with their lower testosterone levels, are likely to feel less pleasure when taking a potentially lucrative if risky financial decision than their male colleagues? In this respect Khunen and Knutson (2005) indicate that as result of the activation of the nucleus accumbens, irrational and risky decisions may be preferentially promoted. This raises the spectre that male bankers could become risk 'junkies'.
So where do we go from here?
It may be overly simplistic to attribute the recent financial crisis to the actions of male bankers or that the difference in risk male and female financial risk aversion is due solely to biology. As Meier-Pesti and Penz (2008) the interactions are complex and can't be easily disaggregated. Bearing in mind the turmoil and pain that resulted from the recent financial crisis wouldn't it be prudent to try an obvious experiment? As well as improving regulation and oversight, why not significantly increase the numbers of women bankers who may be able to moderate the biologically mediated excesses of the men? Isn't it time, as Ferrary (2009) suggests, to let the women securely marshal the world's finances?
References
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