Would ‘Lehman Sisters’ Have Been Able to Avert the Financial Crisis?

by Stefanie Knoll

In December 2013, Mary Barra was appointed chief executive officer of General Motors, becoming the first woman ever to lead a major U.S. car manufacturer. A few weeks later, a snapshot of German minister of defense Ursula von der Leyen together with three fellow female European ministers of defense on the Munich Security Conference went viral on Twitter and was perceived as a sign of increasing female power in politics.

Women are attaining positions once exclusively held by men both in business and politics, and there is a growing body of research on this phenomenon. Nevertheless, women remain a minority in many industries — especially the financial sector. A report by the World Economic Forum in 2010 found that only 2% of CEOs in the financial services and insurance industry in 20 surveyed countries were female. The male dominance in the financial sector has given rise to the claim that masculine behavior has been a major contributor to the 2007-2008 financial crisis.

In “The Lehman Sisters Hypothesis,” a study published in the Cambridge Journal of Economics in 2014, Irene van Staveren of Erasmus University Rotterdam assesses the empirical grounds for the claim that gender differences account for the behavioral drivers behind the financial crisis. In reviewing existing empirical literature on gender-specific behavior, the author focuses on three dimensions that are relevant in the financial sector: risk aversion and response to uncertainty; ethics and moral attitudes; and leadership. (“Lehman” refers to the Wall Street firm that went bankrupt during the crisis; it was one of many American financial firms to have few women in leadership at that time.)

The study’s findings include:

• Several empirical studies suggest that women are on average more risk and loss averse than men (Beckmann and Menkhoff, 2008; Croson and Gneezy, 2009) .

• As a consequence, women faced with increasing levels of risk in expanding financial markets “tend to perform better than men because they take lower risks or take more time to respond to increasing uncertainty than men do; whereas under conditions of relative stability of financial markets, men would perform better than women.”

• A 2011 report by the bank Barclays found that “women use partly different strategies of financial discipline than men.” Women more often use cooling-off periods and “more often avoid information about markets that may lead them to deviate from their long-term strategies. Hence, women seem to be less overconfident than men in their investment behavior.”

• A 2012 study by Booth and Nolen suggests that the difference in risk and loss aversion between men and women may mainly be due to gender-role beliefs. Their study “found that girls in single-sex schools exhibit the same levels of risk in games as boys, whereas girls in co-educational schools take lower risk levels.” The authors of that study concluded that culturally driven norms about appropriate female behavior in co-educational schools influenced the behavior of those girls who had the propensity to make riskier choices and prompted them to make less-risky choices.

• Regarding the ethics and moral dimension of gender differences, van Staveren finds that experimental game theory “has consistently shown that women are more cooperative than men.” Moreover, women’s strategies are more dependent on the context they find themselves in than men’s strategies: “This suggests that women’s reasoning in complex situations is more contextual than men’s.”

• A 2011 study by Kray and Haselhuhn finds that men “more often identify with the interest of an individual agent, changing their attitude towards the sharing of asymmetric information” depending on the roles they were assigned. Women “more often identify with what they consider to be a fair relationship […] irrespective” of the role they are assigned. These findings may reveal that “women’s ethical attitude in a market relationship is more cooperative and oriented towards fair play, whereas men’s ethical attitude is more competitive.”

• Considering the leadership dimension of gender differences, van Staveren reviews a 2012 study by Bigelow et al. that found that a female CEO’s abilities were evaluated more negatively than male CEO’s in spite of being identical.

• The author also notes: “It seems that among business administration students and professionals in the financial sector, gender stereotypes about female managers’ capacities are stronger than the actual ratings of female managers’ characteristics and performance. This legacy of our societies’ gender stereotyping and gender identities helps to explain the strength of the glass ceiling in finance, as well as the phenomenon of the glass cliff during financial crises.”

The author concludes that the empirical literature backs the claim that “more gender diversity in finance, and particularly at the top, would help to reduce some of the behavioral drivers behind the crisis.” She notes, however, that “further empirical research is necessary in order to fill in remaining gaps. In particular in the ethical dimensions, the interaction effects between males and females, and the persistence of constraints for women leaders in banking.”

Related: Also see two conference papers: “Are Female CEOs and Chairwomen More Conservative and Risk Averse? Evidence from the Banking Industry during the Financial Crisis,” and “Would Women Leaders Have Prevented the Global Financial Crisis? Implications for Teaching about Gender, Behavior, and Economics.” For more on the challenges women sometimes face when they do assume high-level roles in organizations, see “Women, leadership and the ‘glass cliff,’” a literature review on the issue.

Stephanie Knoll is a graduate researcher at The Shorenstein Center on Media, Politics and Public Policy at Harvard University. This article was written for Journalist’s Resource, a project of the Shorenstein Center and the Carnegie-Knight Initiative, and is republished under terms of a Creative Commons license.