In an elegant study published in 2008 researchers have shown that higher levels of testosterone correlate strongly with financial risk-taking behavior. In the study, saliva samples were taken from a group of men aged 18 to 23 before their participation in an investment game. The researchers also assessed facial masculinity, associated with testosterone levels at puberty.
All of the participants were given $250, and were asked to choose an amount between $0 and $250 to invest. The participants kept the money that was not invested. A coin toss determined the investment’s outcome, and if the participant lost the coin toss, the money allocated to the investment was lost. However, if the coin toss was won, the participant would receive two and a half times the amount of their investment. At the end of the study, one person was selected by lottery to receive the cash amount of their investment, which created a monetary incentive for the participants.
The researchers found that a man whose testosterone levels were more than one standard deviation above the mean invested 12 percent more than the average man into the risky investment. A man with a facial masculinity score of one standard deviation higher than the mean invested 6 percent more than the average man.Although this study cannot demonstrate causality it does raise the strong probability that testosterone levels influence investment decisions, just as it does any other risk-taking behavior.
This paper dealt with traders, the gun-slingers of the financial industry. But what about the more sedate pillars of our society, the CEOs? Are their decisions affected by how much is their brain testosterone-addled?
The Sept. 16 issue of the Huffington Post published an article titled Testosterone in CEOs Influences M&A Deals: Study. The report, published in Management Science argues that “young male” CEOs, defined as under 45 years old, are more likely than older men or women to both initiate and kill mergers and acquisitions deals. From that finding, the report concludes that testosterone, which young males contain in comparatively high amounts, drives this behavior
I was intrigued and went straight to the source. And here is what I found.
- The researchers used data from Thomson SDC that goes back to 1973, doing analysis based on the CEO’s age. Age as a surrogate for testosterone? The following are data on the mean testosterone level at different ages +/- 1 standard deviation. Not to bore you with statistics, here is a quick reminder: 68% of the area of any normal distribution is within one standard deviation of the mean. In other words, in biology we would consider people who fall within this range as normal. In fact, levels of serum testosterone of given individual can fluctuate depending on the time of day the sample was taken, among other factors. But all the values will be well within 1 S.D.
Age Total Testosterone +/- S.D( in nmoles)
25-34 21.38 +/-5.9
35-44 23.14 +/-7.36
45-55 21.02 +/-7.37
56-64 19.49 +/-6.75
These are numbers; although the means show a minor downward trend (but note that the 25-34 are virtually identical to the 45-55 year old), the spread around the mean makes it totally meaningless. For example, a 50 year old is as likely to have a total testosterone of say 28 nmoles (21+7) as a 40 year old is likely to have a level of 16 nmoles (23-7).
- When companies run by young male CEOs are targeted for a mergers or acquisitions there is a 2% greater chance the CEOs will resist, pushing the bidder to pursue a hostile takeover that bypasses company leadership. This tiny difference is just not credible. Anybody who follows the M&A game knows that any CEO, of whatever age, will resist being taken over by a hostile bid, if for no other reason than trying to extract a better price. The more basic reason is that entrenched management, knowing full well that they will be the first to be shown the door, are trying to save their jobs. This survival instinct is universal, not age-specific.
- When companies run by young male CEOs are targeted for a mergers or acquisitions, there is a two-per-cent greater chance the CEOs will resist, pushing the bidder to pursue a hostile takeover that bypasses company leadership.
- Young CEOs are also 4% more likely to flex their managerial muscles and attempt to acquire other companies. Such a small difference is just as not credible; What is the standard deviation?
- The study shows that younger CEOs “operating with more testosterone in their systems” are 20 per cent more likely to withdraw a merger or acquisition bid than their older counterparts. Now this is a lot more credible, despite the flaws of the study design. First, the large difference (20%) suggests that there must be something there. But this is intuitive. More importantly, there are actually good studies showing the same thing.
In a 2007 experiment Prof. Terence Burnham of Harvard examined the role of testosterone in the “ultimatum game,” a negotiation between two people where participants often reject offers of free money, defying standard economic rationality.
In the two-player game, subjects had to agree on how to divide 40 dollars or risk losing it all. Participants who begin with the entire sum of money could offer only five dollars or 25 dollars to their competitor.
Burnham found that, among those considering the offers, participants with higher levels of testosterone were more likely to reject what they perceived as low offers, ending up with nothing as a result.
So, does testosterone affect decision-making? Definitely, although this study falls short of demonstrating it. Do Boards of Directors need to keep their under 45 CEOs under extra scrutiny? Probably, but a definitive answer awaits a better designed study.
What’s the take home lesson? The public unfortunately, is not capable of delving into every single publication to judge for themselves. But the media can. Financial journalists have the responsibility of teaching themselves the intricacies of statistics, of trial design, of the ins and outs of business. Some are doing a great job, but many are uncritically perpetuating bad information that leads the public astray. The result? a public bamboozled into Enron-like investments, technology booms and busts, subprime mortgages…What’s the next one?