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Published as: Irene van Staveren, ‘The Lehman Sisters Hypothesis’, Cambridge Journal of
Economics, 38 (5), 2014, p. 995-1014.
doi: 10.1093/cje/beu010
PLEASE DO NOT QUOTE FROM THIS AUTHOR’S VERSION BUT FROM THE PUBLISHED
VERSION
The Lehman Sisters Hypothesis
Abstract
This article explores the Lehman Sisters Hypothesis. It reviews empirical literature about gender
differences in behavioral, experimental, and neuro-economics as well as in other fields of behavioral
research. It discusses gender differences along three dimensions of financial behavior: risk aversion and
response to uncertainty, ethics and moral attitude, and leadership. The article argues that gender
stereotypes are influential in finance, constraining women to achieve top positions in banking and
sustaining a strong masculine culture. At the same time, the analysis indicates that the few women who
make it to the top tend to perform on average better than men, in particular under uncertainty. This is
explained by a combination of gender beliefs, gender stereotypes, gender identity, and flexible biological
processes. Although further research is necessary, the existing empirical literature would support a plea
for having more rather than less women in financial trade, risk management, and at the top of the financial
sector.
Introduction
When the financial crisis broke out with the fall of Lehman Brothers in 2008, some commentators drew
attention to the behavioral aspects of bankers. One way in which this was done was by suggesting that it
is particularly masculine behavior, largely exhibited by male bankers, that is responsible for the high-
risk-lobby-for-less-regulation-perverse-incentive behavioral nexus behind the crisis. EU commissioners
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Neelie Kroes and Viviane Reding as well as former UK Minister Harriet Harman and IMF director
Christine Lagarde have phrased this masculine behavioral nexus as the Lehman Sisters claim. This
claim suggests that with more women in the top of banking, we would not have had this deep crisis. In
this paper, I will analyze this claim as the Lehman Sisters Hypothesis.
In order to do this, I need to break down the Lehman Sisters Hypothesis (LSH) into the major
dimensions of financial behavior where gender differences seem to matter. The very diverse literature
on behavioral differences between men and women, covering economics and the other social sciences,
the humanities, as well as biology and neuroscience, suggests three key dimensions of gender
differences in financial behavior. These are risk aversion and response to uncertainty, ethics and moral
attitudes, and leadership. When zooming in on behavioral differences between men and women, we
need to bear in mind that often, such differences are small, also when they are reported to be statistically
significant (Nelson, 2012). And it is important to keep in mind that the share of women in the financial
sector, particularly at high-level positions, is very small. The World Economic Forum’s gender report
for 2010 indicates that only 2% of CEO’s in the Financial Services & Insurance industry in 20 surveyed
countries is female, as compared to 6% for all industries (Zahidi and Ibarra, 2010). In terms of
employees, the financial sector has been feminizing for quite some time, with an increasing share of
women in face-to-face jobs in banks, insurance companies, and in personalized financial services such
as wealth management. But not only at the top of finance the share of women is very low, also in the
types of functions where most money can be made and where least human contact is involved men
dominate: in trading, fund management, risk management, and in the financial whizz-kid activities such
as developing derivatives and securities. In the US, about 10% of all fund managers are women while
only 3% of managers of hedge funds are women (NCRW, 2009). Nevertheless, women have been
playing an active role in financial investment for centuries. In the UK, for example, in the year 1840,
women held 40% of governments stocks (Rutterford and Maltby, 2006).
This gender segmentation of the financial sector follows the stereotype gender segregation lines
in other sectors of the economy. The glass ceiling for top positions in any sector prevents women to
reach top positions at the same speed as men do. While the feminization of service jobs and other jobs
in which communication and human interaction is important, such as in education and health care, find
over-representations of women. The explanations for the segmentation in finance are similar to those of
gender-segmentation in other sectors. They include old boy’s networks, the gender division of labour in
the household making women more responsible for housework and childcare than men, career breaks
due to pregnancy and maternity leave, and prejudice against female leadership qualities (NCRW, 2009).
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What makes finance an even more male-dominated sector has to do with additional prejudice about
women’s mathematical and financial skills and the high-testosterone culture in financial organisations.
Caitlin Zaloom’s (2006: 113) participatory research, as a trader on the trading floors in Chicago and
London reveals “traders as hypercompetitive, masculine actors”. Linda McDowell (2011) refers to
hyper masculinity in her analysis of the financial crisis. Melissa Fisher’s (2012) interviews with top
women at Wall Street shows how women in finance are easily labeled as ‘monster mothers’ or
challenged by sexually explicit and profane language, and eventually see their share in the top of banks
reduced in the aftermath of the crisis. While Hanna Rosin (2012) has explained that the old statistic that
girls score worse than boys in math tests has been defeated over time: nowadays in many countries girls
score just as well as boys. Recent experimental research even suggests that they tend to score better than
boys when they have overcome their dislike for competition in math contests (Niederle and Vesterlund,
2010; Cotton et al., 2013).
The strong disbalances along gender lines in the financial sector implies that the women who
work there, are self-selected into a men’s world, in which stereotype masculine characteristics are
highly valued. Those women deal on a day-to-day basis with masculine norms and male-dominated
decision making. And it is likely that they, more than the average woman, like the abstract, risky, and
highly rewarded tasks of financial decision-making. This self-selection of women in finance is an
important reminder for the interpretation of empirical data on gender differences. It is likely that women
who choose to work in finance behave on average more like men, in particular like men choosing a
profession in finance
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. This could lead to an under-estimation of gender differences in financial
behavior. Hence, this may result in low support for the Lehman Sisters Hypothesis, which assumes a
much wider share of women going into finance – including those who would not self-select into this
sector but need persuasion to move there.
A Theoretical Framework for Gender Differences in Financial Behaviour
In order to be able to interpret the wide diversity of empirical research on gender differences in behavior
relevant tot finance, both from the social and the natural sciences, I have opted for a theoretical
framework, which integrates both social and biological dimensions of behavioral differences between
men and women (see for partial conceptual linkages between nature and nurture: Shelley Taylor, 2001;
Jane Roughgarden, 2004). A comprehensive biosocial framework has recently been developed by the
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psychologist Alice Eagly, based on her decades of empirical studies of gender differences in socio-
economic behavior. Her biosocial constructionist framework offers an alternative to evolutionary
psychology theories in which current male-female differences are attributed to the activation of pre-
determined behavioral repertoires. While her framework is also an alternative to sociological theories,
which reject any biological dimensions of behavior. Here, I draw on the most comprehensive presentation
of her integrated framework (Wood and Eagly, 2012). The biosocial constructionist framework of gender
differences in behavior consists of a vertical dimension and a horizontal dimension. The vertical
dimension focuses on the long run and explains the common, but yet varied, gender division of labour
across the world from two sex differences: male strength and female reproduction, as well as from
economic specialization interacting with culture and the natural environment. These factors have
structured sex differences into gender roles, spheres of behavior and a patriarchal system sanctioning this.
This vertical dimension of Eagly’s theoretical framework is best suited to explain the historical
development of gender differences in structures of todays’ societies and historically grown gender
differences between societies. Behavioral differences between men and women in today’s finance
practices, however, are better understood in the horizontal dimension of the framework, which focuses on
gender patterns and changes therein in recent decades. The horizontal dimension starts from the
ubiquitous gender division of labour in societies, in which men tend to specialize in the public sphere and
women in the private sphere. This involves gender roles, “the shared beliefs that members of a society
hold about women and men” (p. 70), going much further then men’s advantage in strength and women’s
reproductive capabilities of child bearing and lactation. Gender roles include stereotypes, which center
around two predominant stereotypical themes: communion (positively ascribed to women) and agency
(positively ascribed to men). A recent special on women in science of Nature (7 March 2013, vol. 495)
demonstrates how strong gender beliefs still are in modern societies, even among those working in
academia and aware of the risks of such biases. In this special, Jennifer Raymond, a neurobiologist
consciously giving opportunities to young women in her team, discovered through an online Implicit
Association Test (referred to in the article) that even she suffers from stereotyping, leading her to the
conclusion that “most of us are biased” (Raymond, 2013: 33).
Back to the stereotype association of communal characteristics with women and agentic characteristics
with men in Eagly’s horizontal dimension of her theoretical framework. Even though in patriarchy
women have lower status than men, the positive attribution of communal characteristics to women
becomes a system justifying belief to which many men and women hold on, while only some challenge
this dominant belief. It should be noted here, that gender beliefs are very different from essentialism, in
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which women and men are ascribed different natural traits. Behavioral gender differences are
predominantly rooted in nurture, not nature: there is much variation between women and between men. A
recent study has tested whether average differences that can be found in many areas of behavior are
taxonomic (that is, relatively strict and pervasively belonging to either women or men in all attributes of a
particular behavioral item) or placed along a continuum on which individuals can score more or less
feminine/masculine per attribute, so a matter of degrees (dimensional). The authors found that the only
two taxonomic traits, which differentiate men and women, are physical strength and sex-stereotyped
activities listed by adolescents as their preferred activities (like playing rugby versus doing make-up)
(Carothers and Reis, 2013). All other average behavioral differences between men and women appeared
to be dimensional (and one ambiguous gender trait). In other words, both men and women exhibit
communal and agentic behaviors, in many behavioral areas, at varying degrees per individual, with
average differences between women as a group and men as a group.
The next key concept in Eagly’s biosocial constructivist framework, next to gender beliefs and gender
stereotypes determining gender roles, is ‘gender identity’. This concerns the internalization of gender
roles. “People do gender [emphasis in original, IvS] as they recurrently produce social behaviors
stereotypical of their sex” (p. 77). Next to gender identity and gender roles, the framework includes a
biological dimension. However, not as ‘hard wired brains’, a popular concept in evolutionary psychology,
but through the much more flexible biological processes of hormones, neural systems, and cardiovascular
responses. Agentic behavior is related to testosterone and cortisol, hormones that are on average more
present in male bodies, while communal behavior is related to oxytocin and estrogen, which are more
available in women’s bodies. The relationship with gender differences occurs in two ways. Gender roles
affect hormonal levels, for example, nurturing reduces testosterone levels in both men and women (Booth
et al 2006). And the other way around, hormones affect behavior, for example, administered testosterone
to women increases their fairness in bargaining behavior (Eisenegger et al., 2010).
In turn, these three key factors in the horizontal dimension of the biosocial constructivist framework –
gender roles, gender identity and flexible biological processes – together impact upon day-to-day
behavior and attitudes of men and women, often in interaction with each other. For the purposes of my
study, I will rely mostly on this horizontal dimension of the theoretical framework to analyze risk
aversion and response to uncertainty, ethics and moral attitudes, and leadership in the financial sector.
The reason is that the horizontal dimension, focusing on gender roles, identity and flexible biological
processes, helps explain the present rather than historically developed patterns, and it zooms in on
individual and group behavior rather than on societal gender structures. The Lehman Sisters Hypothesis is
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about the current crisis and the day-to-day behavior of men and women in the financial sector. Of course,
these can be traced to historical patterns and will differ between societies, but that is not the focus of the
hypothesis.
LSH dimension one: risk aversion and behavior under uncertainty
During the crisis but also well before it broke out, women fund managers in the US have performed better
than their male colleagues (Chang, 2010). Chang refers to an internal study done by AsiaHedge
concluding that female fund managers in the AsiaHedge Composite Index scored 73% better than their
male colleagues between 2000 and 2007, and a report by Hedge Fund Research showing that women
performed 56% better than men in the period 2000 until May 2009, whereas during the height of the crisis
in the second half of 2008, men lost twice as much as women. A recent study on mutual fund
management in Egypt shows that women perform better than men in an emerging market (Ahmed Azmi,
2008). Another study, among 649 fund managers in four countries, confirms that women in finance are
more risk averse than men (Beckmann and Menkhoff, 2008). A large study on gender differences in the
mutual funds industry in the US does not find statistically significance performance differences, but it
does show that female fund managers follow more stable investment styles and show a higher
performance persistence (Niessen and Ruenzi, 2005). This suggests that female fund managers response
somewhat differently to market volatility – which is a measure of uncertainty – than their male
counterparts. Linked to this, a recent survey by a major UK investment bank, among 2000 wealthy clients
in twenty countries showed not only that women invest more risk averse, but also that they place more
importance on financial discipline than men (Barclays Wealth, 2011). These women referred to patience
and self-restraint as their strategies in response to market volatility. A survey in the US among 2,000 men
and women also showed that women are more risk averse than men: 49% of the women stated they were
willing to take risk for opportunity or reward against 70% of the men (Prudential, 2012). The survey also
found that women simply enjoy the sport of investing less than men (22% for women against 40% of
men). These are not small differences.
As Minsky has explained, uncertainty tends to increase over time in an expanding financial market. This
makes risk aversion and downward risk adjustment even more salient. A recent multi-country study on
high-risk asset investment, such as risky bond trade, shows that fund managers’ strategic behavior to
prevent being fired amplifies the volatility of a risky bond price (Guerrieri and Kondor, 2012). Hence,
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high-risk trade becomes self-reinforcing, so that over time asset prices will become more volatile, with
higher average risk trading in an increasingly uncertain market. When men are more likely to take higher
risks, gender imbalances on the trading floor may reinforce this dynamic.
Gender differences in financial performance are supported by many studies on risk in
experimental economics, showing that on average women take less risk than men (see for an in-
depth review of experimental research on gender and risk: Croson and Gneezy, 2009)
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. But this is
mediated by both a biological factor and a behavioral factor. Women tend to behave less risky
around their ovulation, according to an empirical study by Arndt Bröder and Natalia Hohmann
(2003). And the gender effect becomes very small or even disappears when individuals’ risk
preferences are taken into account next to their sex (Barasinksa and Schafer, 2013), but this
leaves unexplained the gender difference in risk preferences. Also, professional female investors
have been found to be more loss-averse as compared to men, in particular when risk is low or
very high (Olsen and Cox, 2012). In a study on 900,000 limited UK companies, Nick Wilson and
Ali Altanlar (2009) found that companies with a female director had a statistically significant
lower insolvency risk. As a consequence of the average gender difference in risk and loss
aversion, and the trend towards increasing levels of risk in expanding financial markets, women
tend to perform better than men because they take lower risk or take more time to respond to
increasing uncertainty than men do. Whereas under conditions of relative stability of financial
markets men would perform better than women, although this is not necessarily the case (see for
example van den Bos, Harteveld and Stoop, 2009). A famous study by Barber and Odean (2001)
using survey data from 35,000 US households on their portfolio investment behavior, has shown
that women perform even better under normal conditions of financial markets, controlling for
risk diversification in portfolio choice. Men traded 45% more often than women, who tried less
to beat the market, which prevented them from unnecessary and costly trading. Hence, women’s
transaction costs were lower, leading to higher net returns on investment. In couples, men’s
returns were 1.4 percent lower, whereas comparing the behavior of singles, men earned 2.3
percent less in returns. This finding on less trading by women was recently confirmed in the
earlier mentioned survey among 2,000 wealthy individuals (Barclays Wealth, 2011). The report
indicated that women use partly different strategies of financial discipline than men: they more
often use cooling-off periods and they more often avoid information about markets that may lead
to deviate them from their long term strategies. Hence, women seem to be less over-confident
than men in their investment behavior. The earlier referred to study on math contests among
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children explained the lower performance of boys as compared to girls after the first of five
rounds by men’s attitude to over-compete (Cotton et al., 2013). A similar effect of overstatement
has been demonstrated in hypothetical public goods games versus real games. Brown and Taylor
(2000) found in such an experimental setting that men overstate their contributions in a
hypothetical public goods game three times more than women. Apparently, men not only show
over-confidence in behavior, but they also do not seem to be aware of this. A related finding
comes from Weaver et al. (2012), who applied a stereotype threat method to manhood before
letting 73 men play a financial risk game. The stereotype threat (making men unsure about their
manhood) increased the level of risk taken by the men in the experiment and reduced their
investment horizons. This effect was smaller, as expected, when their behavior was in an
anonymous setting, where there was no reputational effect involved. A similar effect works for
women and risk attitude. A recent study by Booth and Nolen (2012) confirms the influence of
gender role beliefs about risk taking on girls. They found that girls in single-sex schools exhibit
the same levels of risk in games as boys, whereas girls in coed schools take lower risk levels.
“Adolescent females, even those endowed with an intrinsic propensity to make riskier choices,
may be discouraged from doing so because they are inhibited by culturally driven norms and
beliefs about the appropriate mode of female behavior – avoiding risk. But once they are placed
in an all-female environment, this inhibition is reduced. No longer reminded of their own gender
identity and society’s norms, they find it easier to make riskier choices than women who are
placed in a coed class” (idem, p. F74).Next to expressing less over-confidence, women seem to
behave more contextually in an uncertain environment. A survey among fund managers found
that women change their strategy more often when they are ahead of or behind the market – “they
try to perform closer to the market development than men” (Beckmann and Menkhoff, 2008:
377). A study on pension fund investment indicates that women tend to diversity their portfolio
slightly more than men, and are less likely to sell when markets are down (Vanguard, 2011).
Professional female investors appear to weight risk attributes more than male investors (Olsen
and Cox, 2001). In particular, the authors found that women weigh the possibility of loss and
ambiguity more then men. However, in a study using a large database on chess playing, it was
found that men adapt their strategy when playing against women, whereas women do not adapt
their strategy according to the sex of their opponent (Gerdes and Gränsmark, 2010). Apparently,
men are more sensitive to the sex of their opponent than women. Men appear to play a more
aggressive strategy when playing against women, and this effect is even stronger when a male
player is on objective grounds (measured with the Elo rating of chess ranking) weaker than a
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female player. Apparently, playing against women triggers a stereotype gender role for men. But
this reaction reduces their winning probabilities, controlling for various other factors: a solid
strategy has a 1.5 percentage point higher probability of winning as compared to an aggressive
strategy, a difference which is statistically significant. Again, this points at over-confidence
among males in strategic settings with uncertainty, with lower pay-offs as compared to the
strategies followed by women. The financial sector itself is increasingly aware of these gender
differences with lower risk and higher pay-offs for women
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. Another type of empirical literature
that is interesting in this respect comes from experimental social psychology, indicating that
abstract thinking increases one’s sense of power (Smith, Wigboldus and Dijksterhuis, 2008). This
ties in with a study in psycho-analytics, arguing that financial assets tend to be regarded as
‘phantastic objects’, leading traders to ignore risks (Tuckett and Taffler, 2008). When markets
move upwards, this unconscious belief in a mental representation of something that fulfills the
trader’s deepest desires to have what he wants and when he wants it, “leads to a growing
excitement and a belief in a more and more contagious new reality (idem, p. 406)”. The authors
explain that “when the bubble bursts this is not due to new information; rather it seems the dizzy
heights reached create an accumulation of split-off anxiety” (ibid.). The authors also suggest that
this psychoanalytical approach helps to explain why anger and blame rather than guilt erupt in
the aftermath of the crisis.
During the heights of the financial crisis, the jobs that require most abstract thinking –
trading, modeling, and developing derivatives – appeared to be the most harmful, expressing
excessive risk. And it is precisely those jobs that are the most powerful as they provide the
opportunity to gain huge bonuses and to attain prestige – and they are least occupied by women
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.
When women fund managers were asked to reflect on the differences between their and their
male colleagues’ strategies when the crisis broke out, they often replied that the men either just
waited for the storm to get over or they kept on trading as before, whereas the women spent more
time on research before they would take a decision (NCRW, 2009). This suggests that women
may be more aware of, or willing to acknowledge, heightened uncertainty than men.
The biological dimension of gender differences in risk behavior finds support in the
empirical literature too. This has been analyzed in particular in neuro-economics, focusing on
hormones. A key study is among 17 male London City traders, testing for the relationship
between two hormones, testosterone and cortisol, on the one hand and financial decision making
and returns on the other hand (Coates and Herbert, 2008, and for a more general interpretation
see Coates, Gurnell and Sarnyai, 2010). Testosterone is known in the literature for the ‘winner
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effect’, because it increases confidence and risk taking. Cortisol is sensitive to situations of
uncertainty (Dickerson and Kemeny, 2004), while it also affects the immune system. The traders
who participated in the study traded in many assets but mostly in German interest rate futures,
closing their trades at the end of the day, and were followed for eight consecutive business days.
Saliva samples were taken twice a day (at 11 am and 4 pm) and profits and losses were recorded
at the same time. The study found that daily testosterone was significantly higher when they
made above average profits. Also, on days of higher morning testosterone levels, traders made
higher profits for the rest of the day than on lower testosterone days. The authors conclude that
“because the days of high 11 am testosterone were different for each trader, thereby ruling out
any general market effects on both testosterone and profits and losses, our results suggest that
high morning testosterone predicts greater profitability for the rest of that day” (Coates and
Herbert, 2008, p. 6168). Tis finding fits well with the biosocial constructivist theoretical
framework of gender differences in behavior, which includes effects of hormones on behavior.
On cortisol, the study found that the more volatile a trader’s profits and losses, the higher were
his average daily cortisol levels as well as the standard deviation in cortisol. This suggests,
according to the authors, “that individual levels of cortisol relate not to the rate of economic
return, as does testosterone, but to the variance of return” (idem, p. 6169). Cortisol rose in 38%
of the subjects’ days, sometimes up to 500%. Also, cortisol correlated strongly and positively
with the volatility of the interest rate of the German Bund, while testosterone did not. Also this
finding can be explained with the theoretical framework, which allows also for an effect of
behavior on hormone levels. The authors of the London traders study signal potential negative
effects of their findings for financial markets. First, when testosterone is chronically elevated, it
no longer has positive effects, but instead increases impulsivity and harmful risk taking, as well
as euphoria and mania, and becomes addictive. This may exaggerate a market’s upward
movement. Second, chronically elevated levels of cortisol stimulate anxiety and a tendency to
find threat and risk where none exist, which may exaggerate a market’s downward movement.
Together, the behavioral effects of these hormones may strengthen market volatility, and “help
explain why people caught up in bubbles and crashes often find it difficult to make rational
choices” (idem, p. 6171). It would be very interesting to see such a study replicated among
women traders, but since there are so few women among financial traders, it will be difficult to
find a comparable sample.
Experimental evidence adds to the insights from the above study. An analysis of 98 men
showed that men with higher at-birth levels of testosterone as well as with higher circulating
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levels of testosterone are more risk-taking in an investment game (Apicella et al., 2008)
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.
Moreover, a test of a male group of 49 London City high-frequency traders shows that traders
with higher at-birth levels of testosterone not only take higher risk but also have more rapid
reflexes (Coates et al., 2009). In addition, this study found that more initial testosterone predicted
higher net profits, both in the short run (a day) and in the long run (20 months). So, the higher
risk paid off for high basic level testosterone traders, even in volatile markets, the authors
demonstrated. In an experimental study with a larger sample size (n = 413, with 53% male
students), Senstrom et al. (2011) confirmed the positive relationship between initial high basic
levels of testosterone with higher financial risk taking among men. Interestingly, among the 194
women who participated in the study, no statistically significant relationship with testosterone
was found. Another study among over 500 students indicated nonlinear gender differences. Paola
Sapienza et al. (2009) found that higher levels of circulating testosterone (hence, not higher
levels at birth) were correlated with lower risk aversion among women but not among men.
Moreover, at low levels of testosterone circulation, the gender difference in risk disappeared.
This implies that higher current levels of testosterone have different effects on risk aversion than
higher initial (at birth) levels of testosterone, and that women react stronger to higher circulating
levels of testosterone than men.
For cortisol, of which men and women have comparable natural levels, empirical studies
show again interesting results. Even though the cortisol levels are similar for women and men,
women’s bodies react much stronger to higher cortisol levels with the secretion of the hormone
oxytocin than men’s bodies (Nazario, n.d.). Oxytocin is a hormone that counters the production
of cortisol and promotes nurturing and relaxing emotions A study on oxytocin and altruism,
among a double-blind placebo-controlled sample of 96 male students in a public goods game has
shown that receiving oxytocin (through a nose spray) is positively correlated with the willingness
to cooperate and the expectation that others will cooperate (Israel et. al, 2012). This suggests that
oxytocin indeed may have positive economic effects in a context of uncertainty, stress and
anxiety-based herd behaviour. In line with these findings, a review article on the neurological
foundations of economic choice concludes that the cognitive control processed by the
dorsolateral prefontal cortex of the brain is impaired during stress and depleted with repeated use
(Fehr and Rangel, 2011). The authors conclude that “this predicts that subjects are more likely to
make short-sighted decisions under stress” (idem, p. 24). So, in order to reduce increasing risk
levels and market volatility in financial markets, a better male-female-balance on trading floors
seems meaningful, while at the same time, male and female traders are advised to learn from the
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investment strategy of Warren Buffet, portrayed recently in a book under the title Warren Buffett
Invests Like a Girl – and Why You Should, Too (Lofton, 2011)
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.
Any policy measure to stimulate risk aversion in finance, however, is confronted with
resistance from trading floors and fund managers, as the participatory study by Caitlin Zaloom
reminds us. She found out that traders not only like to take risk, but actually take pleasure in risk
taking and consider trading mainly as “mastery over the techniques of speculation” (Zaloom,
2006: 85). She describes how she herself experienced the pleasure of trading, beyond the
potential economic gain: “The intensity of focus, the thrill of testing my wits against the market,
the utter absorption in the moment-by-moment action, the absolute nature of being right or
wrong, of making or losing money on every trade helped me to understand the importance that
traders place on engagement with risk for its own sake, not just for profit and loss” (ibid, p. 105).
Whereas the first dimension of the LSH, risk aversion and behavior under uncertainty, relies on abundant
empirical literature, the other two dimensions have much more limited sources to turn to. Next is the
ethics and moral attitude dimension.
LHS dimension two: ethics and moral attitudes
Experimental game theory has consistently shown than women are more cooperative than men
(Croson and Gneezy, 2009). This has been shown with well-known games that test for attitudes
that have combined moral as well as social dimensions, such as the dictator game, the ultimatum
game, the prisoner’s dilemma and the public good game. Moreover, varying game conditions
such as a change in the members of the group or information about players, appear to have more
effect on women’s strategies than on men’s strategies. This suggests that women’s reasoning in
complex situations is more contextual than men’s. This was also found in the literature on the
previous LSH dimension, namely that women not only take lower levels of risk and adapt their
risk levels more than men, but in doing so also weigh-in more factors. Such contextual reasoning
in complex social settings, often involves ethical deliberations. Contextual moral reasoning is a
major characteristic of the ethics of care, developed by Caroll Gilligan on the basis of women’s
experiences with moral dilemmas. On financial risk taking, Croson and Gneezy (2009: 464)
therefore conclude: “we believe, as suggested by Gilligan (1982), that men’s decisions are less
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context-specific than women’s.” This suggests that also in the world of finance, women may be
led more by an ethics of care than an ethics of justice (of rules rather than of relationships).
The ethics of care is attentive to the inter-personal level, where ethics is concerned with
sustaining human relationships and preventing harm to others (Waerness 2009). In the financial
sector this can be done, for example, by recognizing the limited financial means of some clients,
reducing risks that individuals, families or firms run with particular types of investments, or
changing systems of reward which may tempt people to behave irresponsibly. Context, in a
financial setting, refers to harm to livelihood, uncertainty, and perverse incentives (Crespo and
van Staveren, 2012). In the ethics of care, preventing harm to others is contextualized and
requires taking responsibility for the consequences of one’s actions. Not only as an individual but
also through institutions, and responsibility for preventing the system in which one functions to
turn into an uncontrollable chaos causing harm to all involved. Hence, put in a frame of finance,
the ethics of care may be used to analyze the financial system and banks operating in that system.
I have done so in a recent study with two case studies of what I have called caring finance (van
Staveren, 2013). So – what about gender and the ethics of care in moral behavior?
Two studies have tested gender differences in the ethics of care in a variety of moral
dilemmas. Wark and Krebs (2000) found that the ethics of care and the ethics of justice are both
rooted in persons and in types of dilemma’s, for women and men alike. But since women on
average, due to stereotype gender roles, tend to experience more interpersonal dilemma’s, and
men on average more public sphere dilemma’s, women perceive more care-oriented issues in
moral dilemmas, whereas men perceive more justice-oriented issues in moral dilemmas. The
study by Carothers and Reis (2013) mentioned earlier in the theory section, on the dimensionality
versus taxonomy of gender traits, also included a care-orientation versus justice-orientation as
gender trait. Also this trait was found not to be taxonomic, but largely present in both males and
females, although at varying degrees at the individual level (dimensional). But they found
ambiguity between taxonomy and dimensionality for individual care orientation items. This
suggests that a care orientation may not only be found on average more often among women as
compared to men, but also that some care orientation attributes may be more strictly related to
women. However, more empirical research needs to be done comparing gender differences
between the ethics of care and the ethics of justice.
There is only very limited empirical literature testing for gender differences in moral
behavior in firms and finance (see, for a few studies, Robinson et. al, 2000; Dreber and
14
Johannesson, 2008). However, a recent experimental study with 96 MBA students (33% female)
on buyer-seller information asymmetry has done a revealing test for understanding gender
differences in ethical behavior before the outbreak of the financial crisis (Kray and Haselhuhn,
2011). The study finds that male participants more often identify with the interests of an
individual agent, changing their attitude towards sharing of asymmetric information, depending
on whether they were assigned the seller role or the buyer role. Female participants in the study
more often identify with what they consider to be a fair relationship between buyer and seller, i.e.
revealing asymmetric information, irrespective whether they take the buyer’s role or the seller’s
role. The differences were found to be statistically significant and indicate that women’s ethical
attitude in a market relationship is more cooperative and oriented towards ‘fair play’, whereas
men’s ethical attitude is more competitive and oriented towards protecting the interests of the
market side that they represent. These results have led the authors to test a variant of the LSH:
“We began by asking whether a hypothetical Bernadette Madoff would have committed the same
infamously unethical actions as the real Bernie. The current research suggests not and
importantly, offers an explanation as to why not. Though men and women may share common
social and achievement motivations, they appear to differ in the extent to which their experiences
and beliefs are called upon to set ethical standards. By relying more heavily on their motivations,
men derive considerable leeway in setting ethical standards, rendering them more vulnerable to
ethical lapses” (Kray and Haselhuhn, 2011, p. 12). This interpretation finds some support in a
study with 203 in-depth interviews with moral dilemmas to adolescents by Nunner-Winkler et al.
(2007). This study found that high gender identification for boys, but not for girls, was related to
low moral motivation. So, perhaps a strongly masculine environment such as finance may induce
lower moral concerns for men. In her participatory research among financial traders, Zaloom
(2012) characterized them as asocial, adopting “an aggressive demeanor” and to “express
extreme masculine belligerence and overblown competitiveness when they are on the floor and
among other traders” (p. 117). She noticed that the traders were not at all concerned with the
consequences of their trades for people. “There are profits to be made from the economic distress
of countries and individuals, and among the asocial, there is no responsibility to any individual or
to anything outside of their own goals” (Zaloom, 2012, p. 117). Even the very few female traders
joined in the profane and sexist language, she noted. On the other hand, traders exert an
enormous self-discipline, and characterize that as key to their trading success. This does involve
a kind of responsibility: “The central virtue of the responsible trader is acute perception of
financial information” (p. 127). This is, however, not a moral responsibility but a technical one,
15
enforced by the market: “If a trader breaks from his internal codes, the market ‘punishes’ him by
causing losses” (p. 127). Discipline was also found among women wealth investors, as referred to
earlier, who restrained themselves from trading too quickly and from reacting to financial news
when the prices of their assets became volatile or simply going down. Such self-discipline in
finance is an expression of prudence, the virtue already mentioned by Adam Smit as driving
economic agents on markets. For high-frequency trading (short term) it implies acute perception,
whereas for wealth investment (long term) it implies patience. The four elements of discipline
that the traders enforce upon themselves have nothing to do with a concern for other people, but
rather the opposite. Zaloom found out that traders’ discipline involves: (1) to separate actions on
the trading floor from those of their lives outside (2) to control the impact of loss on themselves
(3) to break down continuities between past, present, and future (4) and to maintain acute
alertness in the present moment. They use various strategies to accomplish this discipline, for
example by referring to the currency they trade in not as dollars or pounds or euros but as ‘ticks’.
This leads us to the stereotype threat literature of gender differences and morality. In an
anonymous situation, where social role expectations are excluded, women appear to behave just
as aggressively in games as men, or even a bit more (Lightdale and Prentice, 1994; Stuhlmacher,
e al., 2007). So, when gender roles are made irrelevant by excluding an audience, gender
differences in the asocial attitude of hostility become zero. This suggests that more responsible
financial behavior in real-life settings may require not just better regulation, but also awareness
about how strongly financial behavior in social settings is gendered. And, perhaps, also here
biology plays a role. A recent experimental study has analyzed the relationship between
responder’s reactions in the ultimatum game (which is about rejecting unfair proposals) on the
one hand and certain sex-hormone genes on the other hand. Although the differences in response
behavior between the male and female participants in the game were small, the researchers did
find different sex-hormone genes related to women’s and men’s responses (Chew, Ebstein and
Zhong, 2013).
The empirical literature about ethics and moral behavior in finance is quite limited. That makes it difficult
to draw strong conclusions. But all the studies that I found seem to suggest that women tend towards
more fair and responsible behavior than men in complex social settings, because they seem to be
concerned more with relationships than with interests. It is clear that much more empirical research needs
to be done about the role of responsibility and fairness in financial relationships, and gender differences
therein.
16
LSH dimension three: leadership
Already well before the crisis broke out we see an interesting gender issue concerning well-
known whistle blowers. In 1997 it was Brooksley Born, chair of the US Commodity Futures
Trading Commission who called Congress for derivatives regulation (Chang, 2010). Her voice,
however, was silenced while increasingly non-transparent and complex derivatives and securities
were being developed. In 2006 it was Sheila Bair, chair of the US Federal Deposit Insurance
Corporation, who warned against nonperforming mortgages (idem). Also she was ignored. Again
in 2006, Madelyn Antoncic, risk manager at Lehman Brothers, warned against too high risk
levels taken in her bank. She was sidelined, just a year before the bank collapsed (The
Economist, 2010). Male whistle blowers were, like their female colleagues, also ignored, but they
were further away from the fire, they were academics, such as Steve Keen and Nouriel Roubini
7
.
But it is striking to see that the three women who gave serious warnings and called for change
had top positions within the financial sector. They were insiders, and yet they were ignored or
pushed aside.
Women are scarce in leadership positions everywhere, and even more so in finance. The
explanations for this under-representation refer to gender stereotypes about power and leadership,
which prevent women from reaching top positions (Ridgeway, 2001; van Vianen and Fischer,
2002; Acker, 2006; Ely and Padavic, 2007). Moreover, such stereotyping also tends to make it
hard to earn respect and to remain at the top, as Joan Acker (2006: 447) explains: “women
enacting power violate conventions of relative subordination to men”. After the crisis broke out,
however, we see several financial leadership positions being filled with women. We now have
female Ministers of Finance in Spain, a female Central Bank President in Iceland and female
CEOs of Iceland’s main banks, as well as in various other countries, while in the US, Mary
Schapiro was appointed chair of the SEC (Securities and Exchange Commission) and the FED
and the IMF are now both led by women.
But the fact that we see now women cleaning up the mess may not only be a sign of an
acknowledgement of women’s better performance in financial leadership, but also a reflection of
the hope that they will bring the situation back to normal, which may then lead to replacement of
these women by men and their business as usual. The economic literature has an explanation for
this phenomenon, namely the glass cliff: in times of high uncertainty, women get more often the
17
chance to take up a top position than in normal times, precisely because of the risk of failure
under volatile circumstances. Cleaning up a mess is certainly an expression of caring – mending
the web of relations as the ethics of care scholar Joan Tronto (1993) says. But it may not serve
the women themselves, after the job is done and the sector is back on track – it is relatively easy
to find a reason to push these women over the cliff, since they had to fire and punish some of
their (largely male) subordinates. It may well be that when financial markets stabilize the old
boys’ network will tighten to exclude them as before. Literature on the glass cliff precisely points
at this to happen when women are appointed in top positions that are fragile. Interestingly, this
phenomenon was also found during a financial downturn in an empirical study by Ryan and
Haslam, (2005). They compared firms listed at the London Stock Exchange with higher ratios of
women in the board with firms that had fewer or no women on boards. They found that “in a time
of a general financial downturn in the stock market, companies that appointed a woman had
experienced consistently poor performance in the months preceding the appointment” (Ryan and
Haslam, 2005: 86). They conclude that “such women can be seen to be placed on top of a ‘glass
cliff’, in the sense that their leadership appointments are made in problematic organizational
circumstances and hence are more precarious” (ibid p. 87).
The empirical management literature on women and leadership indicates that women are
not worse leaders than men and that gender diversity in leadership may improve business
performance. McKinsey & Company (2007) have shown that of 89 European listed companies
firms with more women on the board had better financial performance than firms with less
women in executive boards. Fang et al. (2012) show with data of nearly 3,000 US publicly listed
firms that heterogeneity of CEO networks has a strong impact on firm value, including gender
heterogeneity. If the social network of a CEO has a five percent increase in women, this would
result in an increase of 0.6% in firm value. A Canadian study has shown that firms with two or
more women on board rank higher in accountability as well as in profit and revenue (Conference
Board of Canada, 2002). A recent study by Credit Suisse (2012) analyzing almost 2,400
companies worldwide, showed that companies with at least one woman on the board show a
superior share price performance, higher Return on Equity (ROE) and less exposure (debt
equity). Another recent empirical study, by Miriam Schwarz-Ziv (2012), analyzed 402 board
meeting minutes of eleven Israeli boards in which government holds a substantial equity interest
(and therefore have been required to be relatively gender-balanced for already two decades). The
author found that boards with a critical mass of at least three women appear to be more active
and those firms achieved higher ROE and profits. Finally, as referred to earlier, Wilson and
18
Altanlar (2009) also found a relationship between gender balance on boards and firm
performance, but not measured as the share of women in boards but as the sex of the board
director. They found that among 900,000 UK firms, firms with a female board director have a
lower likelihood of insolvency, take on less debt, and have a better cash-flow than firms with a
male board director.
Good management decisions are complex and therefore require a diverse team to take all
relevant factors into account, as has been recognized in the law of requisite variety (Ashby,
1958)
8
. More diverse boards bring in more perspectives in decision making, they may do a better
‘reading of the market’ as compared to homogeneous boards, and they may contribute more
variation in board functioning in terms of communication and questioning established patterns.
Moreover, there is the standard economic argument that by excluding women from boards, talent
is wasted, and opportunities for having the best talents on board are being reduced. Therefore, I
now discuss some empirical studies that zoom in on leadership qualities and gender differences
therein. A recent study using assessments of over 7,000 managers and executives from successful
companies worldwide, of which 36% was female, found that in the majority of areas women
were higher rated than men, including in finance and accounting (Zenger and Folkman, 2012).
The ratings of the individual managers were constructed on the basis of, on average, 13
respondents, such as managers and peers. When disaggregating leadership performance into 16
leadership competences, female leaders were statistically significantly rated better in 12 of these
than men. For example, they scored higher on the following survey items: “follow through on
commitments”, “willingly goes above and beyond”, “improves based on feedback from others”.
Interestingly, the gender differences in leadership competences do not, at first sight, reflect
gender stereotypes about leadership as agentic versus communal. Women score statistically
significantly better on 75% of the items, which include typical agentic items, which are generally
stereotyped as masculine. For example, the biggest male-female differences in favor of women
leaders were found in the competences of “Takes Initiative” and “Drives for Results”, which are
commonly seen as masculine rather than feminine. Female leaders also scored higher on the only
explicit ethical competence that was included, namely “Displays High Integrity and Honesty”, as
well as on relational dimensions, namely “Develops Others” and “Builds Relationships”. The
only competence in which male leaders were rated statistically significantly higher was
“Develops Strategic Perspective”.
These findings can be interpreted tentatively in the light of the findings reviewed earlier
in this paper. The gender differences do not reflect common stereotypes about masculinity and
19
femininity, but rather seem to relate to the distinction between contextual ethics, concerned with
relationships, flexibility, fort-righteousness, and self-discipline, that was found to be more related
to women than to men in the empirical literature. This interpretation receives support from
another empirical study of over 13,000 managers (27% female) who were rated by 64,000
subordinates (van Emmerik et. al, 2008). The study clustered a wide variety of leadership
characteristics into the two stereotypical categories of agentic, and communal. The two
leadership styles appeared to be negatively correlated. Interestingly, the authors found that both
types of leadership behaviors are more strongly expressed by female leaders than by male
leaders. The authors conclude therefore that “Female managers worldwide combine ‘soft’ with
‘hard’ leadership behaviors. One might speculate that female managers actually do a better job
worldwide, as they deploy both more consideration and more initiating structure” (idem, p, 310).
A recent paper by Lyda Bigelow et. al (2012) analyzed whether investors have equal
confidence in female and male CEOs. The experimental set-up among 222 MBA students used
hypothetical descriptions of CEOs that only differed in the sex of the CEO. The experiment has
shown that “despite being identical in the experiment, the abilities and experience of female
CEOs were evaluated more negatively than those of male CEOs (p. 20).” The authors suggest
that the market does not see gender diversity in top management as a predictor of potentially
better performance due to gender stereotypes about female leadership. As explained in the
biosocial constructivist theoretical framework used in this paper, we see again the strength of
traditional gender beliefs, resulting in stereotyping leadership as masculine. This is clearly not
only inadequate, or unfair to women leaders, but also results in stereotype leadership hiring and
assessment, keeping women below the glass ceiling.
It seems that among business administration students and professionals in the financial
sector gender stereotypes about female managers’ capacities are stronger than the actual ratings
of female managers’ characteristics and performance. This legacy of our societies’ gender
stereotyping and gender identities helps to explain the strength of the glass ceiling in finance, as
well as the phenomenon of the glass cliff during financial crises. More female leadership in the
financial sector could probably not only help improve financial governance, but may also
function as a psychological lever to remove the glass ceiling by enabling female leadership to
walk the talk.
20
Conclusion
The Lehman Sisters Hypothesis has received strong symbolic meaning in debates on the behavioral
dimensions of the financial crisis. My analysis of the empirical literature on gender differences in risk
attitudes and response to uncertainty, in ethics and moral behavior, and in leadership, finds preliminary
but clear empirical support for the hypothesis. Women are found to be more risk and loss averse, less
overconfident, and applying a wider range of repsonses to uncertainty. Moreover, women and men react
in a stereotypical way when they need to make decisions in a context with the other sex present or as
opponent: men take higher risks whereas women act more risk averse than they would do in a same-sex
context. In addition, men’s higher testosterone levels and women’s higher oxytocin response to the stress
hormone cortisol help to explain why male-dominated trading floors may exacerbate market volatility,
whereas female investors of hedge funds, wealth management and household portfolios earn higher
returns on investment than their male counterparts. The review of the empirical literature also indicates
that women act more contextual in complex situations with more attention to relationships rather than
interests. Finally, the recent empirical literature on gender and leadership shows that the glass ceiling
mechanisms still operate, despite research demonstrating that female leaders are evaluated more
positively than male leaders. Apparently, leadership is still connected with what people believe to be
masculine values, and hence, more connected with men, even though female leaders use on both agentic
and communal behavior.
The varied collection of insights from the empirical literature indicates that gender differences in
financial behavior should not be very surprising. The behavioral differences found in risk aversion and
response to uncertainty, in ethics and moral attitude, and in leadership, are all explained, or at least made
understandable, in the biosocial constructivist framework of gender differences developed by Alice Eagly.
Financial behavior appears to be no exception to other behavior in which men and women show average
differences.
In conclusion, the Lehman Sisters Hypothesis finds support in the empirical literature. If Lehman
Brothers would have been an investment bank with 50% women, or even 100%, we still would have had
the crisis, given the enormous dominance of men in the rest of the financial sector, the strength of gender
stereotypes, based on outdated gender beliefs and affecting gender identities in often unproductive ways.
Such a ‘sisters bank’ could not have existed in the first place. But the more general viewpoint behind the
hypothesis, that substantially more gender diversity in finance, and particularly at the top, would help to
reduce some of the behavioral drivers behind the crisis, clearly finds support in the empirical literature.
21
However, further empirical research is necessary in order to fill in remaining gaps. In particular in the
ethical dimensions, the interaction effects between males and females, and the persistence of constraints
for women leaders in banking.
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Notes
1
I found only one paper that did an empirical test of the risk dimension of the LSH. It compares female
and male investors in online peer-to-peer lending and does not find statistically significant differences in
risk and portfolio performance (Barasinska, 2010). On the other hand, a study with a more limited scope,
testing for gender differences in fund managers’ decisions, rejects the null hypothesis of no statistically
significant gender differences – the authors argue that women in finance do behave differently from men
in some, though not all, behavioural aspects, despite the self-selection mechanism. (Beckmann and
Menkhoff, 2008).
2
A recent report by the Deutsche Bundesbank on gender and age composition in boards of banks finds
that banks increase their levels of risk when there are more women on the board (Berger, Kick and
Schaeck, 2012). This contradicts the findings of most empirical and experimental research on gender and
risk attitudes. The report does not give an explanation for its findings but admits that there may be a
relationship with age and experience for which it did not control. I suggest that the result may well be a
consequence of men’s reaction to the entry of women in boards. They may exhibit typical macho
behaviour, signalling stereotype manhood to the women by increasing their levels of risk. This potential
explanation is supported by a recent study with data from online chess playing with 15,000 players and
1.4 million games and 15% women. It found that when men play against women, they choose more
aggressive strategies, even though such strategies reduce their winning probability (Gerdes and
Gränsmark, 2010). Further analysis into male reactions to women entering a male domain is necessary
before any conclusions can be drawn on whether a change in risk profile of a bank is driven by an
increase in women on the board or by an over-reaction of the males on those boards to the entry of
women in a traditionally all-male domain.
27
3
An interesting example of a sector response to the insight of higher female financial performance is a
new private equity fund set up by three women in the Netherlands, Karmijn Kapitaal, investing only in
medium scale firms that have women on the board. See: http://www.karmijnkapitaal.nl/en/
4
In May 2012, JP Morgan Chase revealed that one of its traders in London, with the nickname of the
London Whale, had caused a loss of 2 billion dollar, not through fraud but within the bank’s rules and
oversight regulations. The Chief Investment Officer under whom this trader works, Ina Drew, a woman
known for her risk aversion, although having been ill most of the previous year and confronted with
sudden personnel changes, resigned as a consequence (NY Times, 2012; Drew, 2013). On the other hand,
there were a few women involved in the creation and evaluation of toxic assets. TIME features a list of
the 25 people who are to blame for the crisis, which includes two women, Kathleen Corbet who ran the
largest rating agency, Standard & Poor’s during most of the years preceding the crisis, and Marion
Sandler who, together with her husband Herb Sandler were the first to offer tricky home loans back in the
1980s.
5
Initial levels of testosterone are levels that occur in utero, hence, already present at birth. These levels
are measured through a proxy variable, namely the 2 digit to 4 digit ratio: the lower this ratio, the higher
the in utero level of testosterone that a fetus has been exposed to. Circulating levels of testosterone
measure actual levels (which fluctuate within a hour) by saliva samples.
6
Lofton gives the following three-point advise to investors based on Buffett’s experience and attitude: (1)
Value and cultivate your relationships with people (2) Learn from the masters, but be willing to question
them (3) Be fair and operate in an ethical manner.
7
Keen and Roubini have won the Revere Award for having predicted and publicly warned for the crisis.
http://rwer.wordpress.com/2010/05/13/keen-roubini-and-baker-win-revere-award-for-economics-2/
8
This law states that high variation in context can only be adequately dealt with through high variation in
decision-making. Or, more formally, the larger the variety of actions available to a control system, the
larger the variety of perturbations it is able to compensate. This implies that in volatile environments such
as financial markets diverse management teams would be better equipped to deal with crises and their
prevention than homogeneous teams.
