Bankers Will Be Boys

I stole James Kwak's headline because it is too good not to steal. He points to yet another bit of navel-gazing trying to splain the recent unpleasantness in the financial world.

Greedy bankers are getting most of the blame for the current financial crisis. This column explains bankers did behave badly for mainly three reasons. They committed cognitive errors involving biases towards their own prior beliefs; too many male bankers high on testosterone took too much risk, and a flawed compensation structure rewarded perceived short-term competency rather than long-run results.

Kwak comments....

In a fascinating and innovative study, Coates and Herbert (2008) advance the notion that steroid feedback loops may help explain why male bankers behave irrationally when caught up in bubbles. These authors took samples of testosterone levels of 17 male traders on a typical London trading floor (which had 260 traders, only four of whom were female). They found that testosterone was significantly higher on days when traders made more than their daily one-month average profit and that higher levels of testosterone also led to greater profitability – presumably because of greater confidence and risk taking. The authors hypothesise that if raised testosterone were to persist for several weeks the elevated appetite for risk taking might have important behavioural consequences and that there might be cognitive implications as well; testosterone, they say, has receptors throughout the areas of the brain that neuro-economic research has identified as contributing to irrational financial decisions.

Let’s say you could provide reasonably convincing evidence that you would get better long-term results by using a team that had an even balance of men and women. Could you get away with an affirmative action policy that instituted a quota for female traders? According to the Supreme Court’s extremely mushy and frustrating “intermediate scrutiny” standard for gender discrimination, you would have to show that the policy is “substantially related” to the achievement of “important governmental objectives.” (I assume that there’s enough of a state-action component here, since we’re dealing with major, federally-regulated financial institutions.) Reducing systemic risk sounds like an important objective to me.

I'm reminded of a pamphlet handed out to a young people's group at church, "If the Devil made you do it, you blew it!" There's no excuse for what happened. I chalk it up to the most recent reminder that the only limit to human greed it how quickly it can be caught and punished.

If you want an extended exercise in watching otherwise intelligent adults speaking seriously about this nutty idea, go to Naked Capitalism's post "Why Did Bankers Behave So Badly?" In language that makes me think Read. My. Lips. they reprise the other piece, underscoring all three points.

I especially like Number Three: "Bonuses distort behaviour"

No kidding? Who knew?

And the comments thread is just as tedious.