Men prone to overconfidence, women are more risk-averse

Sex may affect investment behaviour, research shows

Jeff Sommer
21 March 2010

Men and women invest differently, a growing body of research has found. And in at least one important respect, women may be better at it.

The latest data comes from mutual fund company Vanguard. It has found that during the financial crisis of 2008 and 2009, men were much more likely than women to sell their shares at stock market lows. Those sales presumably meant big losses – and missing the start of the market rally that began a year ago.

Male investors appear to be overconfident, said John Ameriks, head of Vanguard Investment Counselling and Research and a co-author of the study. “There’s been a lot of academic research suggesting that men think they know what they’re doing, even when they really don’t know what they’re doing.”

Women, on the other hand, appear more likely to acknowledge when they don’t know something – like the direction of the stock market or of the price of a stock or a bond.

Staying the course and minimising costs – selling high and buying low, if you trade at all – are the classic characteristics of good long-term, buy-and-hold investors. But during the financial crisis, the Vanguard study showed, men were more likely than women to trade – and to do so at the wrong times.

That fits the patterns found in path-breaking research by Brad Barber and Terrance Odean of the University of California. In a 2001 study titled, Boys Will Be Boys: Gender, Overconfidence and Common Stock Investment. All else being equal, men traded stocks nearly 50 per cent more often than women. This drove up their costs and lowered their returns.

Barber said: “In general, overconfident investors are going to be interpreting what’s going on around them and feeling they are able to make decisions that they’re really not equipped to make.” Short-term financial news often amounts to little more than meaningless “noise”, he said. Far more than women, men try to make sense out of this noise, and to no avail.

Of course, gender generalisations must be taken with caution: They clearly do not apply to all men or all women. Still, numerous studies show men are more prone to make this particular mistake than women.

Women have also been shown to be more risk-averse than men. In portfolio selection, women tend to have a greater preference for fixed-income investments. That could cause their portfolio returns to lag over the long run – though in a shaky market like the one of the last decade, this greater caution might help.

Selling volatile stocks in a down market – as male investors with IRA (Individual Retirement Account) did more often than women during the financial crisis, according to Vanguard data – might seem to protect a portfolio. But that is not necessarily so. Selling before the market falls and buying after it falls is the smart move. For long-term investors, though, the best strategy may be to ignore short-term market movements (perhaps rebalancing a diversified portfolio every so often).

Gender differences appear to extend to other financial behaviour. For example, women who are CEOs and company directors tend to pay a lower premium in corporate takeovers, saving their shareholders a bundle, according to a 2008 study of mergers and acquisitions by Maurice Levi, Kai Li and Feng Zhang of the University of British Columbia.

What explains these differences? The answer is not clear.

“Is it biological, or cultural?” Barber asked. “Nature or nurture? At this point, we don’t know.”

Researchers, meanwhile, have found that activating the nucleus accumbens – a brain region that is stimulated when you eat delicious food or look at an attractive person – can affect financial risk-taking. When young Stanford men were shown pictures of partially clothed men and women kissing, he said, that region of their brains was activated. And when they were then given financial tests, the men became more likely to “make high-risk gambles”. Women did not respond much to the same pictures, he said; it is possible the researchers did not test enough women or that they have not found the right stimuli. Others studying the effects of hormones on financial behaviour have found correlations between testosterone and risk-taking.

Alexandra Bernasek, a professor of economics at Colorado State University, said the weight of history – enormous gender disparities in earnings, wealth, power and social status – might explain many behavioural differences. It is also possible that evolutionary psychology accounts for some of them. Before the dawn of history, aggressive risk-taking might have given men an advantage in finding mates, she said, while women might have become more risk-averse to protect their offspring.


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