Imagine that you are in the following situation. We are in a team meeting. We all know that the company is not doing great; numbers are rosier on the graphs than what you think is going on in your company. What do you do in that case? Do you go along with everybody, or do you discuss the big elephant in the room? We're talking here about what economists label as conflict of interest. But in layman's terms, let's think about it as just going along or being a team player, or at least not being the whistleblower. That's what sometimes leads to unethical behavior, and out of those unethical behaviors, many times it rolls over into straight fraud.<\/p>\r\n
It's complicated to be the only one in the room that says something, mostly because social pressure is always there. As a result, you end up also nodding along with everybody else. In many cases, over-optimism is what leads to fraud, because it ends up creating an image in the market about a company that is very far away from reality. Those hypes are what are famous for creating bubbles and for collapsing the market. In 2008, you had something close to a bubble. The housing market collapse created one financial crisis after another\u2014a crash that most experts did not foresee. When Lehman Brothers, the fourth largest U.S. investment bank, became the biggest bankruptcy filing in history, we investigated the banking industry, which is well known for being inflicted with all sorts of conflicts of interest, and it has been so for decades. It's been at the center of the dotcom bubble; it's been at the center of the financial crisis.<\/p>\r\n
Think about a large bank that has usually two arms. One is the banking arm\u2014let's call that B\u2014and one is the brokerage arm\u2014let's call that A. And imagine that C is also a client of the bank. In that case, there is a tendency of analysts being overly optimistic towards the client of the bank. The conflict of interest comes from the fact that A and B in the example are under the same umbrella, despite the fact that A and B are supposed to be separated by a wall, especially after 2003 when there was a change in regulation in that respect. We end up still with very similar conflicts of interest. That means that you, as an analyst, are often kind of suggested to be extremely positive toward the client of the bank. You work with your colleagues, they are all in the same place, you meet when you have a coffee downstairs, and they tell you, \u201cHey, I have this client that I'm trying to sign for an initial public offering, and can you help me out there? We really would need the price to go up,\u201d something like that. And of course, that's not supposed to happen. You're not supposed to talk about your clients, but people are still people. Social ties always happen. Group dynamics work that way. Another thing is that in that industry it's very common to say, \u201cWell, everybody does it, so if we don't, we're going to fall behind.\u201d<\/p>\r\n
How do we measure that? Well, we are going to compare the price that is forecasted by a particular analyst for one year ahead for the company C in our example. Those that are not tied to the banking arm have a lower forecast, closer to the reality of the price\u2014what ends up being, let's say, 60. Your analyst that is tied will have a 100. That's already a 40-point difference in the optimism level that can influence shareholders, that can make investors excited about something that is not worthwhile excitement. So that's the type of influence that can become a self-fulfilling prophecy or can end up in a bubble.<\/p>\r\n
More women are rising into positions of wealth. More women are managing money. More women are leading investment banks. More women are in private equity firms at the highest levels. We find that all brokerages that have a higher percentage of female representation end up being less over-optimistic, and it's a sort of soft regulation that surprised us when we found the result. Now, another interesting thing is that this result is not generated by the women in the brokerage houses. It's actually an average effect that occurs equally to men and women working at those brokerages. In other words, it becomes a general norm.<\/p>\r\n
I guess that the next thing that comes to your mind is whether this is actual cause and effect or if it's just a coincidence. We had a couple of ideas to distinguish these scenarios. One of them is by looking at mergers and acquisitions between banks. You imagine that we have two banks that are joined together\u2014from one institution to the merged institution\u2014the very same analyst ends up being less overly optimistic whenever he or she joins a team where there are more women. And the opposite happens when we have fewer women in the team. We do find that every time in the brokerage team there is a higher percentage of women, those forecasts end up being less biased.<\/p>\r\n
Sometimes it's not necessarily about heavy regulation; sometimes even that doesn't work, because many times it's very easy to find a loophole in the regulation per se. What sometimes works better is something as simple as having the right mix\u2014selecting the right people and making sure that you have voices in the team that are not usually heard.<\/p>"]},"_links":{"self":[{"href":"https:\/\/www.ie.edu\/insights\/wp-json\/wp\/v2\/videos\/1475565","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.ie.edu\/insights\/wp-json\/wp\/v2\/videos"}],"about":[{"href":"https:\/\/www.ie.edu\/insights\/wp-json\/wp\/v2\/types\/videos"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.ie.edu\/insights\/wp-json\/wp\/v2\/media\/1475566"}],"wp:attachment":[{"href":"https:\/\/www.ie.edu\/insights\/wp-json\/wp\/v2\/media?parent=1475565"}],"wp:term":[{"taxonomy":"schools","embeddable":true,"href":"https:\/\/www.ie.edu\/insights\/wp-json\/wp\/v2\/schools?post=1475565"},{"taxonomy":"areas","embeddable":true,"href":"https:\/\/www.ie.edu\/insights\/wp-json\/wp\/v2\/areas?post=1475565"},{"taxonomy":"subjects","embeddable":true,"href":"https:\/\/www.ie.edu\/insights\/wp-json\/wp\/v2\/subjects?post=1475565"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}