An overconfident PhD trader with no social life almost certainly will make more money than an appropriately confident mother of two just returning to the workforce after a 5 year break.
The thing about systematically underestimating risk is that it causes you to lose money relative to correctly assessing risk. Just like the vast majority of casino gamblers are idiots who lose money.
By the way, most traders don't have a PhD. I can't even see how it might be helpful.
institutional incentives already mitigate much of the risk of trader overconfidence.
Apparently not in Iceland. Or the US for that matter. I'm pretty sure we had a recent economic collapse in which several trillion dollars of value disappeared caused in part by Wall St firms. To me, that suggests that our institutional incentives for minimizing trader overconfidence might be, you know, not good.
The thing about systematically underestimating risk is that it causes you to lose money relative to correctly assessing risk.
Rationally assessing risk and correctly assessing risk are not the same thing. The former helps one to do the latter, but it is not by any means the only important component. Technical skill, time and effort also matter. A rational trader, without much skill, might correctly assess her strategy as having a 50% chance of success. An overconfident trader, with a great deal of skill, might assess his strategy as having a 90% chance of success when it actually has only a 70% chance of success. The skilled irrational trader will still make more money.
To prove that hiring women would increase profits, you need to show that female traders would make more profits than male traders, not show that they are more rational.
As for a PhD, most trading these days is quantitative. The era of frat boys throwing darts at a stock chart is over. Most trading strategies are designed by quants (i.e., the PhDs, sometimes ABDs, occasionally a masters in math finance), implemented by programmers (usually also having a heavy quant background), and occasionally executed by compulsive gamblers who go nuts over numbers. Most women don't fit this profile.
Also, why do you believe the financial crisis was caused by overconfidence, as opposed to an incorrect evaluation of the facts?
Rationally assessing risk and correctly assessing risk are not the same thing.
Unless you have a time machine or are engaging in insider trading, rational risk assessment is the closest one can get to correct risk assessment.
Technical skill, time and effort also matter.
For some reason, you seem to think I'm claiming that arbitrary untrained women with no experience must outperform experienced male traders with graduate degrees on account of their womanness. I believe nothing of the kind. My claim is that other things being equal, women statistically make more rational risk assessments than men. Of course people in finance should have training and skill. If Wall St. were more committed to better risk management and the profitability that results, then perhaps it would do more to ensure that more women had the necessary training and skill sets; I understand that multi million dollar salaries are quite effective at motivating people.
To prove that hiring women would increase profits, you need to show that female traders would make more profits than male traders, not show that they are more rational.
We don't live in a world where there are lots of women in the upper echelons of the finance industry for comparison, so I can't show that. However, I can show you that all other things being equal, stock investors that are male exhibit overconfidence and trade more frequently than female investors. The net result is that female investors outperform male investors. As in, generate more profits. See http://faculty.gsm.ucdavis.edu/~bmbarber/Paper%20Folder/QJE%...
As for a PhD, most trading these days is quantitative.
As far as I know, most traders are not quants.
Also, why do you believe the financial crisis was caused by overconfidence, as opposed to an incorrect evaluation of the facts?
The two are closely related, are they not? Overconfident people tend to make incorrect evaluations: their confidence makes them ignore discrepancies that should be investigated. It also makes them shut out dissenting voices warning of future problems. Your question seems akin to asking "why do you believe the Challenger explosion was caused by a crappy design rather than the failure of an o-ring seal?".
For some reason, you seem to think I'm claiming that arbitrary untrained women with no experience must outperform experienced male traders with graduate degrees on account of their womanness. My claim is that other things being equal...
You said: Men are more likely to make irrational choices because they systematically discount quantifiable risk. If our institutions were rational, [...] women would be well represented in the upper echelons of the finance industry...
I said: Holding all else equal, you are right. But all else is not equal... [mentions background, skillset, personality, effort]
You said: Um, why does any of that matter when women would increase corporate profits?
That's why I believe you are claiming "womanness" would increase corporate profits - because you completely discounted everything besides that.
Also, your result for retail investors at a discount brokerage is irrelevant. Average trader at financial firms >> average eTrade user.
Regarding quant traders, I admit my personal sampling may be somewhat skewed (I'm a quant trader, formerly academic math). Tell me; what do you believe is the typical background/skillset of a non-quant trader, and what fraction of people with that background/skillset are women?
Also, overconfidence is not the only type of logical fallacy. I suspect that groupthink and an unwillingness to go against the crowd played a much greater role than overconfidence in the housing bubble.
That's why I believe you are claiming "womanness" would increase corporate profits - because you completely discounted everything besides that.
Ah I see. My apologies for my lack of clarity then. In the original comment, I was assuming women traders with some level of skill and experience since I can not fathom a world where Wall St hires people with absolutely no knowledge of finance to run trading desks.
Also, your result for retail investors at a discount brokerage is irrelevant. Average trader at financial firms >> average eTrade user.
It seems quite relevant. Does it prove beyond any doubt that Wall St should have 100% female traders? Of course not. But it does suggest that Wall St firms could reduce risk exposure and improve profits by hiring more women and/or altering their culture.
what do you believe is the typical background/skillset of a non-quant trader, and what fraction of people with that background/skillset are women?
Wait a minute...you're a quant and you're asking me about traders? Don't you already know?
In the original comment, I was assuming women traders with some level of skill and experience...
I'm confused; after I described women as being less likely to get a PhD (one common qualification for finance jobs), you said: Um, why does any of that matter when women would increase corporate profits? If hiring lots of women traders would increase corporate profits while at the same time decreasing the number of PhDs at a firm, why on Earth would that be a problem?
It seems you were originally describing hiring women with less of the qualifications often expected in finance (a PhD in particular), on the grounds that their presence would increase profits. You seem to be changing your argument quite a bit.
As for trader backgrounds, I told you the background of the traders I know. You appeared to disagree with my characterization of traders as mostly quant types. Since you disagree, I'm curious why - perhaps you know something I don't, for instance fields of finance different from mine. Or perhaps you don't.
The thing about systematically underestimating risk is that it causes you to lose money relative to correctly assessing risk. Just like the vast majority of casino gamblers are idiots who lose money.
By the way, most traders don't have a PhD. I can't even see how it might be helpful.
institutional incentives already mitigate much of the risk of trader overconfidence.
Apparently not in Iceland. Or the US for that matter. I'm pretty sure we had a recent economic collapse in which several trillion dollars of value disappeared caused in part by Wall St firms. To me, that suggests that our institutional incentives for minimizing trader overconfidence might be, you know, not good.