Liar’s Poker author Michael Lewis argues in the April Vanity Fair that the male domination of the financial sectors in Iceland was a major contributors to the spectacular collapse of its banking system.
Back in 2001, as the Internet boom turned into a bust, M.I.T.’s Quarterly Journal of Economics published an intriguing paper called “Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment.” The authors, Brad Barber and Terrance Odean, gained access to the trading activity in over 35,000 households, and used it to compare the habits of men and women. What they found, in a nutshell, is that men not only trade more often than women but do so from a false faith in their own financial judgment. Single men traded less sensibly than married men, and married men traded less sensibly than single women: the less the female presence, the less rational the approach to trading in the markets.
One of the distinctive traits about Iceland’s disaster, and Wall Street’s, is how little women had to do with it. Women worked in the banks, but not in the risktaking jobs. As far as I can tell, during Iceland’s boom, there was just one woman in a senior position inside an Icelandic bank. Her name is Kristin Petursdottir, and by 2005 she had risen to become deputy C.E.O. for Kaupthing in London. “The financial culture is very male-dominated,” she says. “The culture is quite extreme. It is a pool of sharks. Women just despise the culture.” Petursdottir still enjoyed finance. She just didn’t like the way Icelandic men did it, and so, in 2006, she quit her job. “People said I was crazy,” she says, but she wanted to create a financial-services business run entirely by women. To bring, as she puts it, “more feminine values to the world of finance.”
Today her firm is, among other things, one of the very few profitable financial businesses left in Iceland. After the stock exchange collapsed, the money flooded in. A few days before we met, for instance, she heard banging on the front door early one morning and opened it to discover a little old man. “I’m so fed up with this whole system,” he said. “I just want some women to take care of my money.”
Nancy Lebovitz quips, “This suggests that if it weren’t for affirmative action and sensitivity training and such, the US financial crisis would have been even worse.” Like Jim Henley, who awards Lebovitz Quote of the Day honors, I find the observation amusing. But one anecdote does not constitute data.
Barber and Odean’s QJE piece referenced above is available as a PDF. Its applicability is somewhat dubious, since it is based on household-level data from 1991 to 1997 rather than contemporary corporate data. Further, its key finding is limited, indeed: Men are significantly more likely to trade stocks than women and trading — rather than holding — stocks tends to be a bad strategy because of transaction costs.
Lewis’ mantra, developed in Liar’s Poker and various articles, is that the financial sector entrusts far too much power in people with very little real knowledge of business. He notes in the linked Vanity Fair piece, for example, that it takes far more training for an Icelander to become a commercial fisherman than a stock trader.
Is hubris and a fondness for risk the nature of the financial professions because they’re dominated by men? Or are these things simply an essential component of the business model — one makes money by trading and collecting fees rather than holding and accruing incremental gains — and therefore more attractive to men?
James Joyner is managing editor of the Atlantic Council.