Expert Knowledge and Gender as Drivers of Forecast Errors

Abstract

A factor that unquestionably amplified the magnitude of the financial crisis was widespread miscalculation by banks and investors. It raises the question why most directors in the bank did not have the foresight to predict the problems of taking on too much risk. This article argues that one reason for these failures may be the under-representation of varied educational backgrounds and differentiated viewpoints in boards. Psychological economics shows that experts and males have the tendency to underestimate the probability of non-typical or negative events. Literature further demonstrates that especially homogeneous groups often engage in herding behavior and thus cause systematic risks. Using a dataset which has been collected shortly before the financial system was in danger of collapsing we demonstrate that females and persons with a non-economic-background were significantly more able to predict the collapsing stock market prices whereas males with an economic background made by fare the worst predictions. A second data sample supports these findings for decision making in a strategic context. The results show that banks which relied on decision committees with a higher percentage of non-economists are less affected by the financial crisis.

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