Manliness and misreporting
20 May, 2016
Years ago I delivered a presentation entitled Investing Without Testosterone to women around the country. The title was apt because there are very real differences between men and women in terms of our investing tendencies.
Men trade often and confidently, they take more risks and they take less time and research to arrive at decisions. Women are risk-averse, we methodically research and need to feel comfortable before investing; we'll generally do so only after receiving endorsement or support from someone we trust.
As it happens, these genetic differences lead to better results for women; the absence of testosterone doesn't hurt us at all.
I thought my title was a bit out there until I recently read a paper about masculinity and testosterone called Manliness Implies Misreporting. It was an academic paper with a rather odd hypothesis. The authors examined the relationship between a CEO's facial features and their propensity to misreport financial results, finding a positive correlation.
The logic is that a person's physical characteristics (eg. facial shape, height and fitness) can predict his/her personality characteristics (eg. aggression, risk-taking, egocentricity). Testosterone influences behaviour and the development of the face shape.
It is impossible to get data on a CEO's testosterone level, so the authors used the male facial width-to-height ratio (fWHR) as a measure of his testosterone exposure during puberty.
For those interested in a self-check, the fWHR is the distance between the cheekbones relative to the distance between the upper lip and the highest point of the eyelids. fWHR is calculated as width divided by height.
The paper studied a sample of 1,136 CEOs from US listed companies in 2010. The authors collected each CEO's measurable, high quality, forward-facing photos from Google and based their fWHR calculation on them. They then ran a regression model against instances of financial misreporting during 1996-2010.
Their findings? Facial masculinity matters!
CEOs with above-median fWHR had a 98 per cent higher risk associated with misreporting financial results than CEOs with below median fWHR. The authors also found facial masculinity can predict the incidence of insider trading and the likelihood of the regulator naming the CEO as a perpetrator. Who knew?
I'm not sure how much credence we should give this study though I will look differently at CEOs from now on... This thesis supported other academic studies that show testosterone influences financial decision-making.
We know higher testosterone levels lead to more risk taking. We are now learning the effects of testosterone can be dynamic because the financial success or failure associated with decisions can in turn affect hormone levels, which leads to a sort of feedback loop.
A recent study examined testosterone and cortisol levels of finance graduate students participating in an investment trial. Participants were given a hypothetical $500,000 to invest, with a goal of growing this to $1.5 million at the end of a simulated 20-year time horizon. All participants achieved the desired goal.
They then completed the same task but in a competitive environment.
While you'd expect participants to make the same decisions the second time around — they achieved their goal after all — participants with higher levels of testosterone and cortisol chose higher risk investments to potentially achieve a higher return.
The authors concluded that behavioural changes are related to hormone levels. They surmised this feedback loop and the interaction of behaviour, outcomes and hormones might even be able to explain the occurrence of stock market bubbles.
Seems manliness has a lot to answer for.