This post is an extended version of an opinion piece published on 17 March in the Irish Examiner:http://www.irishexaminer.com/business/women-are-the-stabilising-hand-in-finance-187420.html
Last week we saw international women’s day, a day that in theory is devoted to the celebration of female achievement. It is celebrated as a public holiday in some countries, mainly those part of the ex soviet bloc, where the holiday originated. Originally an overtly political event that trumpeted the (real, if with mixed outcomes) achievements of the soviet state in enshrining women’s rights, it has more generally evolved to be a celebration of women and female achievements. This weekend sees Mothers Day, a very mobile feast, which of course celebrates mothers and motherhood.
Perhaps the time then is right to consider what finance has to say about women, and in particular to look at some recent research. I dont refer here to personal financial management, although this is an area where women also show distinct differences, but to ‘professional’ financial activities.
The news, gentlemen, is not good: women, qua women, exhibit traits which whether due to the subtleties of the female brain or due to culture, might well make them better financial operatives. This is not to celebrate naive housewife economics, whether the Swabian or Lincolnshire variety so beloved of Dr. Merkel and Mrs. Thatcher. There is a large and emergng body of literature on what we might call the neurophysiology of risk, and among that is the discussion on gender differences. Gillian Tett of the Financial Times has an interesting opinion piece on this.
First, we all know that boys will be boys. In finance this manifests itself as excessive overconfidence by males. Males trade more, take more risk and as a consequence tend to find that on average monies managed by males show greater volatility. Women in general take less risk and adopt a more ‘steady’ hand, avoiding excessive trading costs. This extends from trading to corporate activities, where recent evidence suggests that companies run by females engage in less risky activities, with lower merger and acquisition activities and less debt issue.
Second there have recently emerged a number of papers on women on boards. My research indicates that the appointment of women to boards is market-negative. This makes sense when you consider the earlier findings; boards more female dominated will take less risk, and recent DCU research notes that this will result in lower (short run) returns. Changing board structures to mandate more female members, something that I would wholeheartedly support, will thus have shortterm costs. In the longer term however there is recent evidence that female chief finance officers obtain loan financing that is significantly lower than the average, demonstrating that while the equity market may penalize the loan market values this tradeoff of longer-term slower sustainability for short-term returns. The market, we should recall, is both a valuation and a voting machine. Thus, negative reactions to female activities is a function of both and if there are conscious or unconscious biases (and some research suggests there are) in either by the dominant group (males) these need to be considered.
Thus we find that women in financial situations exhibit a greater aversion to taking risk than do men. This finding is not just evident from these ‘top down’ studies, but is also evident when we survey individuals. Again my own research on Irish adults is in line with international findings. Women show a greater reluctance to take financial risks and this maps to funds managed by women whether on their own behalf or for others. While this might be something valued by some kinds of funds the costs, in terms of lower volatility, to get higher return you have to accept higher volatility. Finance has now moved to the acceptance that not only does risk matter but the perception of risk by the risk taker matters. Risk and feelings about risk go together, and women tend to be more affected by (prospective or actual) risk taking than do men. Females worry more about financial activities than men
Third, research indicates that women are more selfless and less selfish than men in economic and financial transactions. Thus financial settings where ‘winner takes all’ are more likely to be attractive to and dominated by men. The testosterone driven ‘you eat what you kill’ attitude of investment banking and trading rooms is thus the natural environment of men, but of course this as we know comes at the cost of overconfidence and excessive risk taking. Boys will be boys. In more social financial situations, such as startups and venture capital situations where success is inherently to be shared, we find as we do that more balanced gender in the investing groups has a major effect. A caveat however is that this depends very significantly on social capital. While women and men may have similar levels of social capital, important in areas such as financial analysts and venture capital, women gain less from this than men. There is some evidence, quell surprise, that there is discrimination against women in the financial industry. Female fund managers, despite having almost more consistent performance than males attract lower inflows; this prejudice also follows through to ‘foreign sounding’ names it should be noted. IPOs with more female involvement tend to be looked on less favorably than those without. Women can indulge in a touch of Schadenfreude however as startups with higher degrees of gender discrimination show markedly lower survival rates., while the higher the percentage of females in first hires the greater the likelihood of success. This is of course entirely in line with the risktaking and selfish approach of men versus the more inclusive approach of women in economic activity, as startups require both drive and collaboration to get over the first few months.
The bottom line then is that if you seek shortterm gains, more males would be optimal, while for longterm consistent but per period lower returns, more female. The hare and the tortoise analogy comes to mind. The implications are clear for organizations with different time horizons such as pension funds versus trading houses, and for companies with different time horizons in terms of corporate strategy. A system which is set up and dominated by men is unlikely to be conducive to women success, unless they share the same risk attributes as do men. We need to consider that financial markets are social constructs, and that gender differences (whether innate or cultural) are likely to both impact on that and to require us to consider them when analysing or teaching around them.