Bold Words

Recent research indicates that more than company profits fuel the stock market.

In a new study [John Coates] reports that traders who start the workday with high testosterone levels make more money on that day than their low-testosterone colleagues do. A hot day on the market sends their levels of the natural steroid up even more, Coates says; under the influence of their own hormones, they start to take bigger risks in hopes of bigger rewards.

Classical economic theory assumes that people make financial decisions in a rational way. But Coates’s finding is part of a growing body of work explaining why, in reality, they often don’t: they’re at the mercy of their biology. This school of thought helps illustrate how economic trends can get out of control, ballooning until they burst. It also suggests one reason why central banking is so tricky: policymakers don’t often take hormones into account. “[Former Federal Reserve chairman] Alan Greenspan spent his whole career trying to control economic bubbles,” says Coates. “I don’t think he realized he was up against steroids.”

…Anecdotally, Coates says that during his Wall Street days he thought that “women traders didn’t seem to be as affected” by irrational exuberance. A 2001 paper in the Quarterly Journal of Economics backs up that observation. “In areas such as finance,” it found, “men are more overconfident than women.” As a result, male stock traders tend to do more buying and selling than female traders do. Each trade costs money, and over the long term that money adds up. In the final calculus, according to the 2001 paper, it’s men, not women, who underperform. (link)

This study highlights one of the overlooked aspects in the gender debate: men and women DO respond to things differently and acknowledging these differences does not make one a gender basher. I know there are individuals who are resistant to this part of the gender equality debate because they feel it undermines their position.

The idea that recognizing the validity of an opponent’s position is a bad thing has hindered so many issues. Employees vs. companies, Israelis vs. Palestinians, citizens vs. governments, rich vs. poor. When we’re in a fight, why are we so unwilling to see the other’s side? Doing so doesn’t require that we agree 100% with our opponent. If anything, knowing and acknowledging the other side’s position puts one in a position of strength. Isn’t knowledge power? When did we decide that this wasn’t the case?

We often hear that knowledge is power, but do you ever miss the time before you knew something? For example, on days where I’m debating post options, I sometimes wish I didn’t know about blogs. It would mean one less thing to worry about in a day. However, it would also mean forgoing the pleasure of a well-written post and the potential conversation created.

Chasing after knowledge is a balancing act because it comes with an equal opportunity for positive or negative consequences. I remember as a young child, about six or so, that I overheard my mom on the phone discussing the divorce of a family friend. I didn’t really understand what divorce meant, but I knew that it was something adult, almost taboo.

While playing with this friend’s daughter, she made me mad, claiming she knew something I didn’t. I decided to trump her and proclaimed her parents were getting divorced. As you can imagine, the chain of events that followed was less than pleasant. This early lesson in the power of knowledge was painful for everyone involved and has stayed with me my entire life.

I wish I’d never learned about the divorce, but here’s the reality. The knowledge in and of itself isn’t bad, but how I chose to use the information was, and for me, that’s the lesson. How do you use your knowledge?