Sunday, February 08, 2009

"Lehman Brothers and Sisters"

A fascinating column from Nick Kristof today in the NY Times: "Mistresses of the Universe." One of the big questions coming out of the financial crisis that started on Wall Street has been, of course, how could this happen? How could these institutions leverage themselves to such an extent and expose themselves to the huge risk of subprime mortgages? These are supposed to be places that employ some of the smartest, most educated beings around. The boards of these institutions are populated by business leaders and luminaries. Kristof advances the theory that the problem is essentially this:
Wall Street is one of the most male-dominated bastions in the business world; senior staff meetings resemble a urologist’s waiting room. Aside from issues of fairness, there’s evidence that the result is second-rate decision-making.

There seems to be a strong consensus that diverse groups perform better at problem solving” than homogeneous groups, Lu Hong and Scott E. Page wrote in The Journal of Economic Theory, summarizing the research in the field. (emphasis added)
Significantly, one study cited by Kristof indicates the differences in risk tolerance as between men and women:
One of the shortcomings of any system of men sitting in front of screens making financial bets was reported last year in the journal Evolution and Human Behavior, in case you missed your copy. That study found that men are particularly likely to make high-risk bets when under financial pressure and surrounded by other males of similar status.

As for women, their risk-taking was unaffected by this kind of peer pressure.
There are at least three other studies he cites as well, all coming from distinct disciplinary fields that are suggesting similar conclusions. As I said, fascinating stuff, applicable not just to the boardrooms of financial institutions and corporations, but political institutions as well.