The Fed wants to corral the risks that banks take. Too many high-flying bets on sketchy mortgages and financial products that no one really understood got banks into a heap of trouble. So to encourage smarter and less risky practices, the Fed has proposed compensation limits on not only the high-paid executives but also the traders, loan officers and other employees at banks across the U.S.
Good luck. As several analysts have pointed out, limiting bonuses will simply drive the successful players to start their own (unregulated) firms or partner with other non-bank institutions.
The Proof is in the Professions
I have a better idea: why not hire more women? Many studies have shown that women tend to be more risk averse than men. Recent research [1] shows that testosterone is to blame. The higher the amount of testosterone, the more willing people are to take risks. Women, with considerably less of the male hormone coursing through their bodies, are more risk averse. Even women facing death are more risk averse than men in the same situation [2]. Women also, apparently, make better money managers according to another study by two professors at UC Davis [3]. That study found that overconfidence caused men to trade stocks 45 percent more often than women, thus lowering their net portfolio returns by 2.65 percent per year (compared with 1.72 percent lower returns for women traders).
Moreover, several studies show a link between profit and gender. Companies with several high-ranking women at either officer or director levels tend to have higher earnings per share, return on equity and stock prices than competitors with few or no senior women. Look at some of the more stunning losses incurred at banks in recent years: Barings, Société Générale and UBS. All were caused by men betting with other people's money.
In fact, reducing the total compensation of the banking sector might result in more women in those jobs anyway. History shows that occupations that were once predominantly staffed by men (bank teller, waiter, telephone operator, secretary, school teacher) and paid a decent wage became "feminized" while pay has correspondingly dropped. In 1870, women comprised only 2 percent of bookkeepers, cashiers and accountants and a mere 4 percent of stenographers and typists. Today, these jobs are almost entirely staffed by women. What caused this shift? Employers wanting to reduce costs hired more of the "less desirable" workers (women), which freed men up to go after the more lucrative and interesting jobs that came on line as a result of the shift from a manufacturing to a service economy. Employers were further able to keep wages down by enforcing a marriage ban: women who married were forced to resign. Thus, the employer could replace her with a less experienced and lower cost single woman.
Banking on Women
But what is the cause and effect? If a previously male-dominated profession becomes female-dominated, does the total compensation automatically drop? Or conversely, if the total compensation of a profession is forced downward, is that job now less attractive to men and more available to women? One study(4) says not so. In reviewing data from 1983-2001, the researchers found limited evidence that feminization of an occupation causes reduced pay, and no evidence that reducing compensation causes an occupation to feminize. Perhaps 18 years isn't long enough to see any long-term trends. After all, it took more than 100 years for the secretarial profession to flip from 96 percent men to 96 percent women.
Either way, I believe more feminization of the banking sector will lead to more prudent risk taking, and maybe even higher returns. And that would be a very good turn of events for all.
Notes:
(1) "Gender differences in financial risk aversion and career choices are affected by testosterone" by Paola Sapienza, Luigi Zingales and Dario Maestripieri. Published in the Proceedings of the National Academy of Sciences, September 8, 2009, vol. 106, no. 36.
(2) "Are women less risk averse than men? The effect of impending death on risk-taking behavior" by Valérie Harrant and Nicolas G. Vaillant. Published in Evolution and Human Behavior, Vol. 29, no. 6, pp. 396-401. November 2008.
(3) Brad Barber and Terrance Odean, "Boys will be Boys: Gender, Overconfidence, and Common Stock Investment." Published in The Quarterly Journal of Economics, February 2001.
(4) "Does bad pay cause occupations to feminize, Does feminization reduce pay, and How can we tell with longitudinal data?" by Paula England, Paul Allison and Yuxiao Wu. Published in Social Science Research, 36 (2007), pp. 1237-1256.
Rebecca Booth, MD: What Would Happen if Men Lost their Testosterone for a Few Days Each Month?
Understanding the hormonal cycle is imperative for maximizing our physical and mental health, and the younger the woman is when she is enlightened, the better off she will be.
Dan Agin: Cadmium Pollution Kills Human Fetal Sex Organ Cells
One of the most insidious pollutants in our environment is the heavy metal element Cadmium. An important new study is the first to report on the effects of Cadmium on human fetal sex organ tissues.
Fortune 500 Women CEOs - Patricia Woertz (1) - FORTUNE
Fortune 500 2009: Top Women CEOs - FORTUNE on CNNMoney.com
Actually, that is not what Dr Summers said at all. What he stated is that males are represented at the top and bottom of the IQ spectrum. But we wouldn't know would we as the official transcript nor tape recording has ever been released. I have however read the unofficial transcript on Harvard's website.
It is a well known fact that male variance is ubiquitous throughout the animal kingdom as well. Dimorphic disparity is evident not only between males but between males and females.. What Dr. Summers stated was a fact. It is only when the scores are weighted that males and females score the same. Perhaps Prof. Helena Cronin can enlighten you......
In brief:
"And who's overwhelmingly in the top quartile? Males. Look, for instance, at the boy:girl ratios among adolescents for scores in mathematical-reasoning tests: scores of at least 500, 2:1; scores of at least 600, 4:1; scores of at least 700, 13.1."
Source:
More Dumbbells But More Nobels: Why men are at the top BY: Helena Cronin
Maybe hiring women will mean less risk, but also it will men less hard work.
Hold it right there - why is the comparison to "average hedge fund" rather than "male owned hedge fund" ? How can you compare male and female performance without comparing "women-owned" to "man-owned"? You cant.
Or perhaps, women are just seen to be less capable. If so, why does the evidence point so compellingly in the other direction? Over the last 9 years women-owned investment funds significantly outperformed the average hedge fund (9.06% per year vs. 5.82%), and last year, women-owned funds lost only 9.6% in value versus 19.03% for the average hedge fund. Moreover, companies with the highest proportion of women in senior positions are nearly 50% more profitable than competitors in their industries.
I think women are shut out because they don’t look or act like the existing, supposedly successful players. Group dynamics and inherent biases are such that the men in power don’t give women a chance. But also many women (as well as men) don’t like the herculean hours that some of the more “extreme” jobs require. Bottom line, I think that there are plenty of qualified and interested women to staff the finance industry.