True to form, economists have offered a range of explanations for the financial crisis that threatens the world and which so few of them managed to predict. Some blame something called collateralisation, others easy money, still others lax regulation.
But, by focusing on the technicalities, have they overlooked a more obvious culprit - men?
After all, it is men who dominate the financial system that got us into this mess; it is men, by and large, whose trading inflated the profits of banks to levels that now seem like the stuff of testosterone-fuelled fantasy; and it is men who pocketed most of the bulging bonuses that even Gordon Brown reckons were a key cause of the crisis. All of which raises an important and deliciously controversial question: what would have happened if global financial institutions had been run by women?
Would they have been more focused on the human consequences and less on the next pay cheque? Would they have been more empathetic and less cut-throat? Would financial districts have had a few more crèches and a few less of those godawful bars where traders hang out to brag about their latest deal? In short, would we have avoided this calamity if markets had been doused with sufficient quantities of oestrogen?
Julia Noakes, a psychologist working with City high-achievers, is in little doubt. “The problem in finance is that there is too much thrusting individualism and not enough femininity,” she says. “A lot of women are deterred from striving for senior management positions because they don't want to deny 50 per cent of their personalities.” Heather McGregor, a City headhunter, echoes this analysis with the arch observation that “the UK bank that has come out of the current crisis strongest is the one that has most aggressively promoted women into positions of senior management: Lloyds TSB”.
But this is dismissed as stereotyped claptrap by other financial leaders. One senior banker summarised the views of several managers and traders to whom I spoke when he said: “If women ran the City it would have made no difference, and it is sexist to suggest otherwise. Sure, mistakes have been made, but are you saying that women would have walked away from the huge profits being dangled in front of us? Get serious.”
So, who is right? The question cuts to the heart of two of the fiercest modern controversies: “How do financial markets actually work?” and “Are men and women really so different?”
The first thing to note is that men and women may be similar in many ways but they are measurably different when it comes to risk-taking. This is borne out by the fact that men pay higher car insurance premiums, and corroborated by dozens of experiments into financial decision-making. Nobody disputes this, but a surprising number of psychologists (often women) argue that they are the product of a sexist culture and that women would be liberated into taking as many risks as men if they were not so oppressed - if, for example, they ever found themselves running the City. At the risk of sounding impatient, they are wrong.
The reality - familiar to anyone who has read Darwin - is that sex differences are, to a large extent, biological and would remain in place even in a society dominated by women. These differences are not limited to financial markets but manifest themselves in everything from walking the dog to catching a train. A study by researchers at Liverpool University, for example, showed that men were more likely than women to cross a busy road when it was dangerous to do so. But they also found that men were willing to take even greater risks when women were in the vicinity. This is not to say that men consciously calculated the risks and weighed them against the probability of getting laid, but rather that nature has cumulatively selected the rushes and thrills that men experience when they engage in risk-taking - and it has selected women to go weak-kneed in response. In short, it is the divergent reproductive strategies of the sexes that drive the differences in behaviour.
The coming together between risk-taking and sex was given a nice gloss in an experiment in which men were asked to gamble on the toss of a coin. This experiment was then repeated, except that an erotic photograph was flashed up just before they had to make their decision. And guess what? Although the photo was irrelevant, men tended to risk more money. To put it another way, men are inclined, on occasion, to think with something other than their brains (as, in different contexts, are women).
The mechanisms at work here are intriguing. It is well known, for example, that the surge of testosterone in male foetuses in the middle trimester of pregnancy is instrumental in building male-type brains, which are larger (although female brains have more densely packed neurons) and more compartmentalised into left and right hemispheres (which may explain why men are less adept at multi-tasking) than women's brains.
But testosterone not only helps to build the male brain, it also plays a key role in activating it. In one experiment, researchers followed 17 male City traders and found that when they had high morning levels of testosterone they made greater profits for the rest of that day. They reasoned that this could be because higher testosterone increases the appetite for risk - a phenomenon that could be extremely dangerous in certain market conditions.
As Professor Joe Herbert, author of the report, put it: “Any theory of financial decision-making in the highly demanding environment of market trading now needs to take these hormonal changes into account. Inappropriate risk-taking may be disastrous.” Looking back, it sounds almost prophetic.
But before concluding that the financial catastrophe is all the fault of testosterone-intoxicated delinquents, let us consider the nuts and bolts of financial decision-making by looking at a major culprit in the current crisis: mortgage-backed securities. As we all now know, banks pooled mortgage assets of varying quality and sold these on to other institutions, who sold them to others, and so on. It is financial products derived from these securities whose value has plummeted with the collapse of the US housing market and which are now likely to be purchased by the US Government at a cost to the taxpayer of about $700 billion (£388 billion).
Now, a lot of people have blamed the crisis on the very existence of these securities, but this is simplistic. The problem is not the securities per se but the fact that the risk associated with them was mispriced, in part because the rating agencies (paid by the lenders) failed to do their job properly. Had the risks been properly priced, lenders would have been paid less for the securities (whether they were being purchased by men or women), which would have made lenders less hell-bent on making risky loans, which would have drained oxygen from the housing bubble, and so on. This suggests that the crisis had little to do with male risk-taking but was a simple case of market failure which could be rectified easily with a tweak or two.
A similar analysis can be applied to almost every link in the complex chain connecting home-buyers, mortgage brokers, lenders, credit agencies, central banks and we the taxpayers, who may yet be left holding the baby. Does this mean that the “technical” explanations offered by economists are right on the money, and that I have led you on a wild goose chase? Well, no. This mini-detour is being taken for a reason, for it shows how the reasoning of traditional economics is so dangerously seductive. It shows how, by focusing on the links in the chain, economists have lost sight of the chain itself. And, more pertinently, how they failed to notice that the chain is, to speak metaphorically, a very male thing: gold, chunky and ostentatious.
We have already seen that behavioural differences between the sexes are on-average differences (yes, some women are greater risk-takers than some men). But here we should note that even small average differences can come out big when they are driven by the cumulative effect of thousands of individual decisions and become embedded in a dominant culture. And it is this, I think, that is to blame for the current crisis.
The mispricing of risk in mortgage-backed securities, to go back to our example, was not merely a failure of the rating agencies, it was systemic. It drew on an entire, male-dominated ethos: rating agencies were a part of it, but there were also the banks that failed to provide sufficient information about the securities they were selling, buyers of securities who displayed a staggering disregard for the principle of caveat emptor (buyer beware) and traders who, intoxicated by a booming market, were not merely unaware of what they were purchasing but didn't even care. All in all, it was propelled by a dizzying disregard for risk and it took only a few broken promises for the house of cards to collapse.
The problem is that the market became too primal, too dominated by men and their baser instincts, too preoccupied with greed and too little with the consequences. But have I not implied that this is unalterable and that men are slaves to their impulses? Well, no. I did not suggest that culture and ethics are impotent, merely that they are rarely sufficient to eradicate the evolved differences between men and women. Take physical aggression. Although absolute levels of aggression vary from nation to nation, the difference between male and female aggression is pretty consistent (the ratio of men's to women's same-sex murders, for example, is remarkably constant at about 10-1).
So how do we limit excessive risk-taking? Tougher regulation and beefed-up moral hazard (ie, making banks more accountable for their mistakes) will never be enough. What is needed is a transformation in culture that would most readily emerge from a huge influx of talented women into the boardrooms and on to the trading floors. A scattering of women is insufficient, for the women who tend to make it into the upper echelons are precisely those likely to be at the male end of the behavioural spectrum.
A critical mass of females, however, would transform the ethos, the working environment and even the working hours in a way that would reduce the probability of another financial apocalypse. It is worth remembering that the whistleblowers at both Enron (Sherron Watkins) and WorldCom (Cynthia Cooper) were female. The City needs more women - and it needs the remaining men to get more in touch with their feminine sides.
