Who is the better investor, a man or a woman?
If you have been in the financial advisory business long enough, you begin to discern certain patterns when it comes to gender differences when it comes to investing.
First of all, in the vast majority of cases (and it wouldn’t surprise me if it is more than 90%) of married couples, it is my observation that the man is more aggressive than the woman when it comes to their investments.
Now I have never done a true study, but after 28 years of being a financial advisor, it has absolutely been my experience that the vast majority of women are more conservative investors than their male counterparts.
When clients come into our office for the first time and we are doing our normal discovery process, when the question of how much risk they are willing to accept comes up, the man almost always says he is willing to take on more risk than the woman.
So it was somewhat coincidental and certainly interesting that I picked up a book called, “The Psychology of Investing.” The book was written by John Nofsinger, a college professor at Washington State University. As a matter of fact, this was the fifth edition of his book that was originally published in 2002. It is my understanding that he uses the book as a text book for his students in his teaching capacity at Washington State.
At any rate, his book is all about the psychological biases that people have when making investment decisions. One of the biases that can come into play is “overconfidence” according to Nofsinger. For example, he quotes from a 2001 Gallup/Paine Webber survey of individual investors. (Okay, I know Paine Webber no longer exists, but the survey is valid none-the-less). When the investors were asked what they thought the return of the stock market was going to be in the coming year, the answer was 10.3 percent. When those same investors were asked what they thought the return on their own portfolios was going to be in the coming year, their answer was 11.7%. Typically investors expect to earn an above average return, according to Nofsinger.
So let’s get back to the gender differences of investing.
Nofsinger cites studies that show that men are more overconfident than women in tasks “perceived to fall into the masculine domain, such as managing finances.” He says, “Men generally are more overconfident about their ability to make investment decisions than women are; therefore male investors trade more frequently than female investors do.” He points to a 2001 study by Brad Barber and Terrence Odean entitled, “ Boys will Be Boys: Gender, Overconfidence, and Common Stock Investment” that shows that the annual portfolio turnover by single men is higher than that of married men, but both are higher than married women. Single women were shown to have the lowest turnover percentage.
In English, what this means is that men buy and sell stocks and other securities in their portfolios much more often than women and this is due to men’s overconfidence in their ability to outperform.
Now if you take this to its logical conclusion, if men’s overconfidence was accurate as it pertains to their ability to outperform, then their portfolios should do better than women’s portfolios.
Sorry guys.
The studies show that the higher turnover of portfolios actually correlates with lower annual returns. It is also pointed out by Nofsinger that the lower returns are not just because trading costs might be higher in portfolios that are turned over more often. A major contributing factor is that men’s portfolios tend to have higher risk stocks in them because generally men suffer from the overconfidence bias and tend not to see the risk.
So here’s my conclusion: Women tend to have lower risk investments than men and trade less frequently than men. Since the studies show that the lower turnover portfolios tend to have better returns, I would conclude that in general, women are better investors than men.
It’s a little ego bruising, isn’t it guys?
