Nature or Nurture: Diversity in the Financial Services

By Melissa J. Anderson (New York City)

In a New York Times opinion piece this weekend, Cambridge research fellow John Coates describes with compelling detail the way hormones influence the behavior of (male) traders. He writes, “[Testosterone] produced by men (and, in lesser quantities, by women) primes the trader for the challenge ahead, just as it does athletes preparing to compete and male animals to fight. Rising levels increase confidence and, crucially, appetite for risk.”

Considering the awe with which Coates narrates the effects of the chemical trio testosterone, adrenaline, and cortisol, you’d think he was channeling Sir David Attenborough. “Finally… the trader leans into his screen, pupils dilated, breathing rhythmic, muscles coiled, body and brain fused for impending action.”

Coates suggests that this biological interplay is so pronounced in younger men that it can drive markets to soar or crash.

His solution? More women. “Women and older men have a fraction of the testosterone of young men, so if more of them managed money, we could perhaps stabilize the markets,” he writes.

In Coates’ bleak description of the (male) trading mechanism, he envisions women as the brakes for a contraption spinning out of control. Calls for diversity are, of course, appreciated. But using women as a tool to gum up the works, rather than overhauling a system that overrewards risky behavior, seems more like a quick fix than a long-term solution. More seriously, it reduces individual humans to purposefully ill-fitting cogs in a corporate machine.

Would you want to work for a company that only hired you because it believes your biological construction is inherently ill-suited for the way its top performers make money?

Hormones or Culture?

Based on his preliminary research, published by the National Academy of Sciences, Coates and his team found that higher testosterone levels led to greater risk-taking. They also found that higher levels of cortisol are correlated with “chronic risk aversion,” symptomatic of a market crash.

To his credit, Coates, a former trader at Deutsche Bank, says he believes the system is imbalanced.

“At the moment, I fear we have the worst of both worlds — an unstable biology coupled with policies that encourage too much risk-taking during bubbles and too little during crashes, as well as a bonus scheme that penalizes prudent risk-taking. Nature and nurture conspire to create recurrent disasters. Risk management needs to dampen these biological waves, not amplify them.”

But his suggestion that simply injecting women into the system will fix it is concerning.

It would be nice to believe that adding more women to the financial services industry would mean a simple solution to the market-crashing “hubris” that Coates describes. And, of course, significant research shows that increasing gender diversity in firms can produce better outcomes.

But to reap the rewards of gender diversity, companies also need to grow the culture where women can thrive. If women’s only purpose in a firm is to temper the risky swagger of biologically overconfident men, they’re not going to stick around long or perform their best.

Fairness Not Numbers

In its latest Women in Finance Survey, the Financial News noted a significant shift in the presence of women on boards. This year, 52.2% of women surveyed confirmed that there are women on the board of their company, compared to 44.2% last year.

This is likely due to the push for increasing the number of women board directors in the UK following the Lord Davies Report. Most of the women surveyed (64.5%) did not support gender quotas for company boards. But the vast majority (86.6%) believes companies should conduct equal pay audits.

Rather than adding more women at the top, respondents want to ensure the system is fair throughout.

According to the survey, almost two-thirds (65.6%) said they feel being female has made it harder to succeed in their career. When describing which factors characterize a company that treats women fairly, the top answer was “attitude of bosses,” followed by “pay/financial rewards,” and then “attitude of male colleagues.”

The fact that attitudes and pay equality figure so prominently when describing a company that treats women fairly, even higher than the presence female role models at the firm, shows that diversity is more than a numbers game. It’s about changing attitudes and culture, rather than packing women into a system where they aren’t welcome or supported.

Coates makes a good point that firms should hire more women, but an incomplete argument for change. Women traders are not and shouldn’t be viewed as mere babysitters to rambunctious boys. Firms that want to get the most out of gender diversity will have to recalibrate their system of financial risk and rewards, as well as evolve the attitudes of bosses and male colleagues. Culture change isn’t easy – but those companies that do it well will prosper from diversity in the long term.