The financial world should obviously be run by women

More of this would be a very good thing.
More of this would be a very good thing.
Image: AP Photo/Seth Wenig
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It’s a well-established fact that pretty much everything on earth would run better if women were in charge. That dictum would seem to extend to the financial markets.

Look no further than the February edition of the prestigious American Economic Review for a quick refresher on the rafts of research that lead to such a conclusion.

In a paper (paywall) entitled “Thar SHE Blows? Gender, Competition, and Bubbles in Experimental Asset Markets,” Texas A&M’s Catherine C. Eckel and Sascha Füllbrunn, of Radboud University in the Netherlands offer new experimental evidence on the differences between the sexes when it comes to trading behavior, as well as a survey of the economic literature on gender and behavioral finance. This has been well-trodden research ground for more than a decade. So what do we know? (Or what do social scientists think we know?)

All of those findings merely serve as fodder for the authors’ own hypothesis: Male-dominated markets should generate bigger speculative bubbles than female-dominated markets.

As female-dominated financial markets are few and far between, the authors use experimental asset markets—laboratory experiments for financial economists—to try to figure out the answer. In such experiments a group of “traders” are given some electronic “cash” and “assets” that pay regular dividends. Those dividends are supposed to help set a fundamental value for the experimental assets. (When such experiments were first developed in the 1980s, the prevailing wisdom was that markets would take their cues from fundamentals, and the markets would steadfastly price assets in relation to their stable dividend values. Instead, researchers found was that boom-and-bust patterns prevailed.)

Anyhow, the authors of the paper in the current issue of American Economic Review ran some of these studies themselves, except their markets were either all-male, or all-female. The results? All-male markets produced much larger bubbles. (That is, the asset prices diverged sharply from the fundamental “value” suggested by the dividend payments.)  All-female markets, on average, didn’t produce bubbles.

“What we see is a pretty dramatic difference between markets that are dominated by men and markets that are dominated by women,” says Eckel, the Texas A&M professor who co-authored the paper. “Which makes you think the world would be a little bit different if financial markets weren’t the way they are.”

Interestingly, all-female markets sometimes produced “negative bubbles,” that is, prices that were actually below the fundamental values suggested by dividend payments. That leads to a rather stark—and slightly depressing—finding:  ”Women’s expectations,” the researchers wrote of the price of assets in the experiment, “are substantially below that of men.”