The Psychology of Investing (pt 4): Men vs. Women. Does your sex set you up to be a better investor?

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Men are from Mars, Women are from Venus.  Unfortunately as neither of those planets have an active stock exchange we will need to compare earthbound returns to answer the question: “Who trades better, men or women?”

As in most areas of life, few things are so basic that they can be boiled down to your gender determining your success (although in terms of the “number of pregnancies” scoreboard, women have us beat by a long shot.  Come on guys, step it up…).  Surprisingly, in the world of investment gender is actually a key indicator of performance.

So who tends to be a better trader, men or women?  In this category women come out on top.  So not only do they get to live longer than we do, they’ll also have more in their 401(k)’s after they bury us.

The reason for this is obviously not strictly biological, but rather finds its source in risk tolerance.  Women statistically ten

d to be less risk averse than men.  Risk is not a bad thing, however an investor who is not appropriately risk averse will become overconfident.  Overconfidence can be disastrous for a portfolio.

Overconfident investors trade too much, and they get lower results as a result.  Frequent trades, even profitable ones, incur additional fees and taxes.  This can make seemingly attractive deals ultimately be less profitable than the long, low risk strategy.  Overconfident investors also take more risk.  Benjamin Graham spoke truth when he wrote: “The investor’s chief problem, and even his worst enemy, is likely to be himself.”

Men tend to be more overconfident than women.  This is probably why we also don’t stop to ask for directions.  Statistically men trade 45% more than women.  This frequent trading saps returns.  One study showed annual returns of men to be .93% lower than women.

Interestingly enough, your marital status also impacts your risk aversion.  While men in general traded 45% more than women, single men traded 67% more than single women.  With regards to trading frequencies numbers have shown that from most frequent to least frequent the rankings are:

  1. Single men
  2. Married men
  3. Married women
  4. Single women

So it appears that marriage has a way of mellowing out male investors while making female investors less risk averse.  Gentlemen, take note:  Marriage will statistically improve the returns of your retirement portfolio.  Ladies:  You might want move some cash into an ETF, because your husband may increase your desire to start day-trading.

As I stated before these traits are not exclusively based on whether you are a man or a woman and mileage will vary based on individual dispositions.  However, science has shown that there may be a significant biological component to this phenomenon.  Testosterone levels directly impact risk taking.  A man with high levels of testosterone is more likely to engage in risk taking behavior, even if there is little gain and high potential of negative outcomes.  Not just that, certain activities that are considered more masculine (sports for example) has shown themselves to temporarily boost the bodies levels of testosterone.  Investing is often perceived as a masculine task.  This means that stepping onto a trading floor may temporarily spike a man’s testosterone levels, making him more likely to engage in higher-risk investing behavior.

What can we learn from this:

  1. Recognize your natural disposition towards risk.  This is necessary regardless of gender.  There are high-risk women and risk-averse men.  Where do you default on the spectrum?  Are there any changes necessary in your approach to investing?  Do you need to show more restraint?  Do you need to take more risks?
  2. Display humility.  Humility is one of the most under-appreciated traits in the world of finance.  For all your training, education and experience there may be other people who may just be hard-wired to invest differently than you.  Diversification is valuable in investment, that goes for gathering other people’s insights in addition to you own.  The Biblical proverb rings true: “Plans fail for lack of counsel, but with many advisers they succeed.”

This blog post is based on the content of a lecture delivered by Tippie professor and Director of the Henry Fund, Todd Houge.

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