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Wednesday: {{snort!}} “Testosterone Poisoning is REAL”

Julius Caesar crosses the Rubicon and risks it all

Julius Caesar crosses the Rubicon and risks it all

Check out this must read from James Kwak at Baseline Scenario on risky behavior in the banking industry.  He cites another post at VoxEU by Anne Siebert entitled “Why did the bankers behave so badly?”.   They behaved badly because they were overconfident.  This overconfidence was brought on by three things: confirmation bias, a steroid feedback loop and bonus compensation strategies.  In other words, we have a repeat of The Smartest Guys in the Room that brought down Enron.

The steroid feedback loop hypothesis is fascinating.  I’ve referred to it as testosterone poisoning.  We saw it up close and personal on some of our former favorite websites like DailyKos during the election.  Aw, Jeez, here come the guys again doth protesting too much.  “How dare you insult our gender, you insensitive, brazen hussy!  You discriminate against me and my brethren.  Help!  Help! I’m being oppressed!”  Give it a rest, guys.  This phenomenon has legs.  Some geeky types have been doing research on the subject:

There is a substantial economics literature on the effect of gender on attitudes toward risk and most of it appears to support the idea that men are less risk averse than women in their financial decision making.1 There is also a sizable literature documenting that men tend to be more overconfident than women. Barber and Odean (2001) find that men are substantially more overconfident than women in financial markets. In general, overconfidence is not found to be related to ability (see Lundeberg et al (1994)) and that success is more likely to increase overconfidence in men than in women (see, for example, Beyer (1990)). Thus, if confidence helps produce successful outcomes, there is more likely to be strong feedback loop in confidence in men than in women.

In a fascinating and innovative study, Coates and Herbert (2008) advance the notion that steroid feedback loops may help explain why male bankers behave irrationally when caught up in bubbles. These authors took samples of testosterone levels of 17 male traders on a typical London trading floor (which had 260 traders, only four of whom were female). They found that testosterone was significantly higher on days when traders made more than their daily one-month average profit and that higher levels of testosterone also led to greater profitability – presumably because of greater confidence and risk taking. The authors hypothesise that if raised testosterone were to persist for several weeks the elevated appetite for risk taking might have important behavioural consequences and that there might be cognitive implications as well; testosterone, they say, has receptors throughout the areas of the brain that neuro-economic research has identified as contributing to irrational financial decisions.

A couple of interesting things jump out at me in the above paragraphs.  First, overconfidence is not related to ability.  That is, assertions that one is God’s gift to the financial world are not born out by any qualitative measurment of performance.  So, all you rich brokers and financiers who are whining that you lost your bonus or job and can’t afford the summer rental in the Hamptons this year to support the new servant class that you refuse to pay a living wage probably didn’t earn it in the first place.

The other thing that strikes me as interesting is that we don’t really know what would happen if we had  more women in the financial industry.  It is mere specualation that they wouldn’t fall prey to the same behaviors.  It isn’t clear to me that there isn’t as much nurture as nature going on in excessive risk taking.  But I think we can say that there is a very high barrier for admission to the party for women.  Four females out of 260 traders on a typical London trading floor is pretty pathetic.  If it is true that the steroid feedback loop is responsible in part for risky behavior, then breaking up the critical mass of men with additional women would be a worthwhile experiment.  But how do you get women in there?  Are women discouraged from pursuing these kinds of jobs in the first place?  Let’s assume that there is a “nurture” component to the absence of women in the financial industry and unpack some real world scenarios.

First up, a woman applying for a particular job on the trading floor is responsible and takes her fiduciary responsibility seriously.  In the atmosphere of testosterone poisoning, she would be seen as weak and not pulling her weight sufficiently.  Her lack of risk taking behavior would not be compensated nor praised.  Even women’s egos need stroking.  Why would a woman who is responsible want to subject herself to this?  Good question.  We should ask Sheila Bair, Elizabeth Warren and Hillary Clinton.  All three of these women have bucked the system and have advocated a bottom up approach to solving the financial crisis.  All three have met tremendous resistance from the status quo and the new status quo of the incoming administration.

Now let us consider a woman who has the temprament to compete on the same level playing field as a man.  This woman would not just need to be smart and ambitious, she would also need to possess the kind of moxie to seek forgiveness rather than permission.  She has to possess the kind of overconfidence that make people believe her.  In the real world, these kind of women don’t have a prayer.  They are labeled pushy, troublemakers, “not team players”.   We reward women for being team players, obedient and pleasant, not for being aggressive risk takers.

So, adding women to the mix is unlikely to be of any great assistance because the environment of the financial industry at the present time is incompatible with preferred gender behaviors.  There are a couple solutions to this problem.  We could either allow women to exercise these facets of their personalities so that they can compete with men in a dog eat dog world.  I think we should do this anyway because it’s time that smart ambitious women were encouraged to take risks.   But this wouldn’t solve the immediate problem of excessive risk taking in the financial sector.

The other solution is to punish excessive risk taking behavior and testosterone poisoning to begin with.  That is, hold people accountable for excessive risk taking.  As Paul Krugman says, make banking boring again.  It has been done before.  As Elizabeth Warren points out, the boom-bust cycle that plagued the American economy every 10-15 years since the creation of the republic didn’t happen in the 50 years that followed the Great Depression.  That’s because we had such a great shock to the system that we knew that curbing these behaviors was the only way to make sure the testosterone poisoned didn’t bankrupt us again.

The problem is that few people alive now remember what the Great Depression was like and the present shock to our system may not be as acutely debilitating, requiring clear, immediate steps to save the system.  Instead, it’s going to be like chronic back pain.   We’ll still have to work through it but the pain will never completely go away.  We’ll be expected to muddle through it, debating whether an operation or bedrest will make it end.  Meanwhile, the testosterone poisoned will go their merry way, wrecking havoc.

Podcast of the day: Mike Duncan has a terrific podcast on the History of Rome.  History does indeed repeat itself.  Oligarchs apparently have behaved the same way for a long time.  And unfortunately for all of us, there are only a few harsh remedies for getting rid of them.  Check out Insert Well Known Idiom Here.

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Your Breakfast Read, Served By The Confluence

Morning Read

  • Everybody Loves Nancy
  • Maybe the GOP should keep looking for the real culprit of “Torturegate”.
    Democrats Defending Pelosi

    House Democrats have rushed to the defense of Speaker Nancy Pelosi in her public battle with the CIA, a reflection of the enormous loyalty the California Democrat enjoys in her caucus despite a month-long effort by Republicans to use the dispute to weaken her standing.

    Under fire, Pelosi gets backing from fellow Democrats

    In a sun-soaked Rose Garden ceremony announcing tighter auto emissions and mileage standards, Obama opened by heaping praise on Pelosi, saying she has “just been cracking the whip and, you know, making Congress so productive over these last several days. We are grateful for her.”

    If it’s Cheney, it must be torture

    Every time you turn on the television, there he is, defending the Bush-era interrogations of terror suspects, including the simulated drowning procedure known as waterboarding, and excoriating President Obama for outlawing them.

  • A Personal plea
  • VA Dems, I beg of thee: please DO NOT vote for Brian J. Moron Moran
    Va. Democrats Play a Rerun of Clinton vs. Obama

    One of the other Democratic candidates, Brian J. Moran, a former state delegate, said in an interview months ago that Mr. McAuliffe’s loyalties to Mrs. Clinton would be a liability. Now Mr. Moran has now matched those words with a very explicit radio advertisement, that began airing across the state this week.

    Va. Candidates Clash In Final Debate of Democratic Primary

    Deeds, Moran Go After McAuliffe As Campaign Enters Homestretch

  • How did this happen? Did the President announce the closing of Gitmo just on a whim. It sure looks like there was no prior consultation with the Democratic majority in Congress. Or maybe there actually was, but Dems have become weak-kneed for fear Republicans might call them “Terrorists-Loving-gay-communists”
    Democrats Plan to Block Gitmo Closing

    Bowing to political pressure, Senate Democrats said Tuesday that they planned to withhold funding to close the prison at Guantanamo Bay, Cuba, until President Barack Obama presents a plan for handling its 241 detainees.

    Democrats also plan to prevent the administration from spending any money to transfer Guantanamo detainees to the U.S. during the current fiscal year, which ends Sept

    Democrats in Senate Block Money to Close Guantánamo

    In an abrupt shift, Senate Democratic leaders said they would not provide the $80 million that President Obama requested to close the detention center at Guantánamo Bay, Cuba. The move escalates pressure on the president, who on Thursday is scheduled to outline his plans for the 240 terrorism suspects still held there.

  • Good Move
  • Obama Won’t Stand in The Way of Courageous Judges
    Obama won’t oppose ruling weakening ‘don’t ask’

    The Obama administration, criticized by gay rights advocates for not following through on a campaign promise to repeal the “don’t ask, don’t tell” policy on military service, has taken a quiet step to allow a federal court in San Francisco to limit enforcement of the policy.

    Obama Avoids Test on Gays in Military

    The Obama administration has decided to accept an appeals-court ruling that could undermine the military’s ban on service members found to be gay.

    Pentagon: No plans to end don’t ask-don’t tell (From the comments, h/t zaladonis)

  • Headaches Here, Headaches There
  • Tragedy In The Skies
    98 killed in Indonesian military plane crash

    Shades of Iraq, millions spent in Afghanistan lack adequate oversight

    Israeli settler leader says: ‘We are running rings round the authorities’

    Pakistan can clear Taliban territory, but can it hold it?

    Hillary Clinton announces $110 million in U.S. aid to Pakistan

  • Economy Watch
  • Senate passes credit card overhaul bill

    The credit card companies seem to have few friends on Capitol Hill these days, with even the most business-minded lawmakers siding with consumers in speaking out against steep rate hikes and fees.

    As with anything comiung from the Congress, you have to read the fine print. Here is a great primer of the Senate legislation
    Credit-card bill: What it does, what it doesn’t do

    A good analysis of the bill from the NY Times
    Dealing Consumers a New Hand in Credit Cards

    At first glance, the sweeping credit card legislation that passed the Senate on Tuesday looks like a huge victory for consumers. The bill, after all, contains relief from penalty fees and certain interest rate spikes.

    But for people who pay off their bills each month, and milk the card rewards programs for everything they’re worth, there is some cause for concern.

    The new regulatory structure begins to emerge (Felix Salmon)

    The WaPo all-star team of Zachary Goldfarb, Binyamin Appelbaum and David Cho broke the news this evening that Elizabeth Warren’s dream of a Financial Product Safety Commission is likely to become reality

    Obama economic panel moves into the spotlight

    Japan economy shrinks at record pace

    Japan’s economy contracted at the fastest pace since 1955 as exports plunged, companies slashed production and families spent less.

    Japan’s real gross domestic product, or the total value of the nation’s goods and services, shrank at an annual pace of 15.2 per cent in the January-March period, the government said today.

  • GOP Quo Vadis?
  • The GOP finally came up with its healthcare plan: It’s not really new and it’s still guffaw inducing
    The GOP’s Health-Care Alternative

    GOP insiders are not impressed with RNC chief Michael Steele
    Captain Steele isn’t doing much to save GOP’s sinking ship

    It’s not yet clear how the one-armed midget demographic is shaping up, but everybody else seems to be bailing on the GOP.

  • The One And Only: Bob Somerby
  • Why is progressive cable so light?

    Why has Countdown turned into Clowndown? Why is a progressive host like Rachel Maddow insulting average people (“tea-baggers”), while endlessly kissing the keister of Colin Powell’s number-one man? Why does so much of this channel’s work now feature the type of staged overstatement previously seen on pseudo-con cable? We often ask ourselves questions like these as we watch these progressive news programs.

  • Just For The Fun Of It
  • A “plagiarized” account of Maureen Dowd’s plagiarism

    How MoDo lost her mojo

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