Neuroeconomics – Put Women in Charge?

Neuroeconomics

The Observer newspaper for June 19th carried a great article on gender equality and the economic melt down of 2008. In essence it says the relatively new science of neuroeconomics proves beyond doubt that hormonally driven young men should not be left alone in charge of our finances. It seems, despite generally being thought risk averse, women make better financial decisions than men.

The author of this article, Tim Adams, cites two books one authored by Michael Lewis, The Big Short. Here’s a quote by Lewis from the article:

When asked what single thing he would do to reform the markets and prevent such a catastrophic happening again, he said: “I would take steps to have 50% of women in risk positions in banks.” Pressed on this he went on to suggest how science reveals that women in general make smarter decisions regarding investment than men, that when it comes to money, women in couples are demonstrably better at evaluating risk than their partners, and single women much better still.

Women are Better with Money

In a way this shouldn’t be surprising; women are generally described as risk averse but that doesn’t mean we don’t make astute decisions about money. The evidence seems to back Lewis’ assertion.

In 2001, a study called ‘Boys Will be Boys’ looking at household finances, found that although men were confident in making multiple changes to investments, their annual returns were, on average, a full percentage point BELOW those of women who invested the family finances, and nearly half as much again inferior to single women.

And a further study of 2.7 million personal investors found that during the crisis of 2008/9 men were much more likely than women to sell their shares when prices were at their lowest. They appeared to be OVERconfident while women weren’t afraid to ask.

Now I have no real knowledge of how the financial work works but I do know that women being equally represented in the world of work makes sense on all levels, and that companies that have 3 women directors on their board show a significant increase in profits.

Women and Finance

So why so few women employed in the world of high finance? Surely it’s obvious that the more diverse your group the better the decision making processes? I suspect that once again it comes down to women not wanting to be employed in such a testosterone fuelled environment.

And testosterone has quite a lot to answer for. The new science of Neuroeconomics has been looking at the role of both testosterone and cortisol hormones. The survey was  small so further research is needed, but here are six things that the science of decison making revealed:

  • If groups of young men are shown pornographic pictures of women and then asked to choose between safe and risky investments, compared with men shown non pornographic pictures they chose far riskier portfolios.
  • Our brains are designed to seek out novelty but too much information can overwhelm us; we are generally better at assessing risk when listening to Bach rather than the chatter of news.
  • Men’s brains tend to shut down after they have proposed a deal, waiting for the response. Scans show that women’s brains continue to be active, analysing whether they have done the right thing.
  • Humans are the only animals that can delay gratification, a function of the prefrontal cortex. However, the prefrontal cortex only matures after the age of 30, and later in men than women. Before that we are likely to seek immediate gratification.
  • Our brains reward social interaction with the release of oxytocin (the bonding hormone). Following the herd makes us feel good.
  • Our brains are wired for human oxytocin -mediated empathy (or HOME). We are biologically stimulated to love or hate what is most familiar to us. We are built to form attachments, to value what we own more than what we don’t own and this skews the rationality of all investments.

It’s fascinating stuff, isn’t it? The macho culture, it seems, just doesn’t cut the mustard! Come on women, time to step up. Your country needs you!

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Posted on June 20th, 2011 by

One Response to “Neuroeconomics – Put Women in Charge?”

  1. I couldn’t agree more – women make great investors! Professor Karen Pine has done lots of talks and written on this subject. It’s a message that we’re constantly trying to deliver through Sheconomics and through my one-to-one financial coaching work.

    Great article Jane!

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