Common belief paints finance professionals as competitive risk-takers who can be unconstrained by ethical considerations, a narrative fuelled by financial scandals and economic crises. Martin Holmén, Felix Holzmeister, Michael Kirchler, Matthias Stefan and Erik Wengström study how finance professionals differ from the general population in their economic behaviour and personality, and discuss whether policy interventions can be made.
In the past decades, the finance industry has been riddled with scandals, most recently the collapse of FTX and the takeover of Credit Suisse. As a consequence, its reputation has suffered. Often enough the public debate has drawn an undifferentiated picture of the finance profession. This is worrisome as the finance industry is among the largest worldwide and bears systematic relevance for the economy, a fact underscored by “too big to fail” discussions after the financial crisis of 2008. The public’s perception of the financial industry is critical to its effective functioning. Financial products are complex and customers have to trust their banks to make the best choices on their behalf. In this respect, financial advisors are very much like car mechanics. It is hard to know if the product sold was tailored to the customer’s needs. Inferior decisions and bad advice are difficult to detect even in retrospect: Can we reliably distinguish between a bad turn of the economy and bad advice?
As the industry’s main protagonists, finance professionals shape it with their personality traits and economic preferences, such as altruism, attitudes toward risk, honesty, and trustworthiness. Professionals’ behaviour has direct consequences for both their clients and society as a whole. Christine Lagarde, president of the European Central Bank, put it in a nutshell: “As I have said many times, if it had been Lehman Sisters rather than Lehman Brothers, the world might well look a lot different today”.
Are finance professionals different?
Is it correct to say that finance professionals are different from laypeople? In a recent study, we take a closer look at the characteristics of the main protagonists of the finance industry to understand it from an economics scholar’s viewpoint. We provide a comprehensive picture of a multitude of individual-level characteristics and collaborate with Statistic Sweden to gain additional background information on participants in the study. We examine whether finance professionals differ from a representative sample of the working population in relevant preferences and traits and how to explain potential differences.
The study design
We conducted an online experiment in Sweden with 298 financial analysts, investment advisors, traders, fund managers and financial brokers, plus 395 people from the working population. In economic experiments, participants make decisions in simplified tasks, so that their behaviour can be analysed. For example, to determine individual risk tolerance, participants are asked to choose between lotteries with increasing expected returns and increasing risk. Participants are actually paid based on their decisions. So, the more risk they take, the more they can earn — and lose. The choice behaviour observed in this stylised decision environment allows proxying how risk-tolerant an individual is.
Finance professionals versus laypeople
In our study, we find that finance professionals, on average, differ from participants from the general population in several aspects. They tend to be more risk tolerant, more selfish, less trustworthy, and more competitive. They also show higher levels of what personality psychologists refer to as the “Dark Triad” (the name speaks for itself, but more precisely, the relevant traits are narcissism, psychopathy and Machiavellianism). These results suggest that finance professionals effectively differ from people employed in other industries, particularly in characteristics often used to sketch the dark side of the finance industry.
This is not the end of the story, however, since we know that the socio-economic background of finance professionals is, on average, different from the one of the general working population. Thus, we adjust the differences between finance professionals and laypeople for gender, age, income, and educational background to have a second look. We find that finance professionals tend to be only slightly more risk tolerant, remain less trustworthy, show a slightly increased level of psychopathy and are still more competitive than comparable participants from other industries. Thus, behavioural differences can, to a certain degree, be attributed to the fact that finance professionals are predominantly male and, on average, better educated than workers in many other industries.
Selection or imprinting?
These findings raise the question of why finance professionals are different. Three explanations come to mind: industry selection, self-selection or imprinting (for instance, through “industry norms”). Take the example of gender imbalance. It might be the case that finance professionals prefer to hire male job candidates; or maybe females prefer not to work in the finance industry; or potentially the ‘masculine’ banking culture shapes its members. To shed light on the origin of the observed differences, we run an additional survey with experts who have hiring experience in the financial sector. We investigate whether they consider industry selection, self-selection and imprinting by industry norms as the explaining factors for the results in our experiment.
All three channels are considered to play at least some role in explaining differences in risk aversion, trustworthiness, and competitiveness. For psychopathy, only self-selection into the industry is perceived as somewhat explanatory for subject pool differences. Experts, thus, do not describe self-selection, industry-selection and imprinting as mutually exclusive. Rather, the three channels are conceived to be correlated, presumably in a self-reinforcing manner. For instance, it can be expected that fewer female contestants apply for a job in an industry that is dominated by males. Such an industry, predictably, shapes the few females with norms and a culture that is typically considered masculine, creating gender-related barriers that again discourage women from entering. Of course, gender is only one aspect, though a particularly important one.
Conclusions
Our results suggest that finance professionals indeed differ from the general population in several aspects that are relevant to financial decision-making. Part of these differences can be attributed to variation in socio-economic characteristics, which are shaped by the finance industry itself. One can expect that the selection of finance professionals into the industry affects its peculiarities and culture, which, in turn, can lead to self-selection effects in future contestants. Policy measures could, for instance, increase the fraction of female professionals by changing the industry culture (for instance, by introducing flexible working hours, childcare facilities and mentoring programs). This could lead to increased self-selection of female professionals into the industry in the future and change the culture in the long run, thereby causing a transition in industry selection and screening.
- This blog post is based on Economic Preferences and Personality Traits Among Finance Professionals and the General Population, The Economic Journal (2023).
- The post represents the views of its author(s), not the position of LSE Business Review or the London School of Economics.
- Featured image provided by Shutterstock.
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