Of Men and Markets

The newest critique. Professor Anne Sibert:

Since few would characterise the bankers and other employees of financial firms as an unintelligent group, it is interesting to ask why they behaved in such an egregious fashion; I advance three theories…

The first explanation is that humans are prone to cognitive errors involving biases towards their own prior beliefs…

If men are especially prone to being insufficiently risk averse and overly confident, then this male dominance may have contributed to the financial crisis…Barber and Odean (2001) find that men are substantially more overconfident than women in financial markets…steroid feedback loops may help explain why male bankers behave irrationally when caught up in bubbles…

[Third] In a recent paper, Hamid Sabourian and I advance a third reason for the behaviour of bankers; a flawed compensation structure that rewards perceived short-term competency, rather than good long-run results causes bankers to distort their behaviour in an attempt to increase their perceived ability…

We’ve heard number 3 before, which I’m a fan of, as well as number 1, but gender at number 2 puts a special twist on number 1. Matt Yglesias links to an Ask a Feminist youtube segment at TAP where they discuss whether it is sexist to think men caused the financial crisis. The feminists agree with critique #2 above, and cite Michael Lewis citing the same Barber and Odean (2001) study. Here is the youtube clip:

I have two sets of problems with these kinds of arguments, one set technical but one set more ideological.

Discrimination

The Barber and Odean study looks at portfolios selections of households chosen by a man versus the returns on those chosen by a woman. They find that the men’s portfolios tend to underperform women’s, with the driver being the extra transaction costs they pay to do extra trading. Women’s portfolio outperform by .34% annually (p. 275) – statistically significant, and a fair amount of alpha, but not quite a dealbreaker.

What worries me is that, when they look at the alternate explanations they look at whether men enjoy gambling with money or whether there are different rational risk tolerances that explain this. What they don’t look at is discrimination. If women are discriminated against inside their marriages, especially in the division of labor, then there is reason to believe women would only do investments if they were particularly good at doing investments. The authors might argue that that endogeneity result works against their results – if a particular woman was ‘good’ at doing investments, she’d invest more often, but women actually invest less, showing restraint. I’m not so sure. (The study does have 30K men to 8K women in the sample.)

Reification, Habitus, Performativity

I’ve been doing too much micro-level finance on this blog, let’s kick in some critical theory.

I am in general not a huge fan of these behavioral arguments for the financial crisis. Notice how the tone of the first article is something akin to: “Market always work, but sometimes we let them down with our feeble minds.” There is something about the behavioral critique that reifies market values. It assumes away the problems we are finding in the markets themselves by defining human nature as the problem. Read that again above. “Financial markets are fine – the problems are all in the chemicals and hormones in our bodies, and the fact that American Men are kind of assholes who don’t ask for directions.” Oh, ok! It has that Russian show trial quality to it, the “The Party has never been wrong, but we have often been nothing but a burden to it.”

It ascribes a consciousness to the Market that it doesn’t have, and frankly, in this nightmare, doesn’t deserve. More importantly, when it comes time to regulate and handle the aftermath of crisis, putting a lot of weight on this critique leaves us with a rhetorical blindspot – if motivated people are bad at this stuff, why would a government employee be any better?

That isn’t to say that the behavioral critique is wrong – I think it is very correct, though I often don’t like how it gets deployed. You often see it often get mentioned in terms of the crassest evolutionary biology stuff – men are jerks, women like babies, therefore women are good with stocks. Even though Wall Street often people come from a very small select group of Ivy School schools and MBA programs, and as such have the same class bias, have studied the same methods from the same textbooks, and are conscious and oblivious of the same kinds of events as having meaning, I’ve never seen it get deployed in terms of the notion of habitus. James Kwak started such a critique using cultural capital, god bless him, but the commenters erupted into heckles.

I think there are good arguments that financial markets are going to be inefficient and problematic on their own, and need regulation to manage information problems, among other things, that are well within normal textbook economics. I do think there is another critique, that economics and finance makes it up as it goes along and requires the performance of itself in order to be sustained. I was excited when then mentioned feminism and the financial crisis, because I want there to be more freebasing the hard feminist theory stuff, the ideas surrounding performativity. I think the critiques about performativity and the economy – whether or not economics and finance is a “camera or an engine” of the economy, or whether or not the economy produces itself by having the power to reiterate itself – is compelling. Economic sociology is starting to get to get some solid narratives going (I’d recommend that book), and hopefully it will continue to go as the future progresses.

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