Academic researchers and behavioral economists have been putting in the long hours and hard work necessary to tease out the differences between how men invest and how women invest. The studies and surveys go back years and cover nearly every aspect of investing--decision making, risk assessment, trading frequency and consistency of results, just to name a few.
Researchers have also studied the differences among professional investors, both male and female, highlighting the fact that these variations in temperament aren't limited just to the universe of the individual investor. And some of the most interesting recent studies have just begun to uncover the role of testosterone in investing, risk taking and trading. You're not shocked to hear it has one, are you?
Brad M. Barber and Terrance Odean of the University of California (Davis and Berkeley campuses, respectively) published what is likely the most famous and groundbreaking study on gender differences in investing with their February 2001 Quarterly Journal of Economics paper, "Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment."
By surveying 35,000 discount brokerage accounts over a nearly six-year period, Barber and Odean found several distinct differences both in temperament and performance for men versus women. Their paper was predicated on prior research, which had shown that men tend to be more overconfident than women in so-called "manly" pursuits (of which we can still count finance). Put simply, men think they know more than they do. Women are more willing to admit that they know what they don't know. They're more willing to own up to the fact that they don't know everything.
How does the issue of overconfidence play into investing behavior and results? Well, because of their overconfidence, it was assumed--correctly, as it turned out--that men would trade more than women do. And what does more frequent trading do to your investment results? It drags them down, running up transaction costs and acting like the proverbial albatross on what might otherwise be smart investment decisions.
Barber and Odean found that men traded the stocks in their accounts 45% more than women did. This excessive flip-flopping of securities reduced their net returns by 2.65 percentage points, compared to the 1.72 percentage points women dinged their accounts by trading. Single men were even worse offenders, trading 67% more than single women.
The key here is that women's trading hurt their performance less than men's, thanks to men's greater overconfidence. The difference, then, is more related to temperament than it is to skill. You can be the smartest securities analyst around, but not having the correct mindset can absolutely sink you as an investor. All the know-how in the world can't correct for bad habits. Temperament matters, plain and simple.
What's interesting here, however, is that there was not a performance advantage for women over men thanks to their calm, patient temperaments. Performance between the two groups was about equal. But performance isn't everything. Consistency and "performance persistence" (or the ability to generate steady returns year after year) matter too. You can count on 'em.
The eight traits female investors share with Warren Buffett:
1. Trade less than men do
2. Exhibit less overconfidence: men think they know more than they do, while women are more likely to know what they don't know
3. Shun risk more than male investors do
4. Be less optimistic, and therefore more realistic, than their male counterparts
5. Put in more time and effort researching possible investments, considering every angle and detail, as well as considering alternate points of view
6. Be more immune to peer pressure and tend to make decisions the same way regardless of who's watching
7. Learn from their mistakes
8. Have less testosterone than men do, making them less willing to take extreme risks, which, in turn, could lead to less extreme market cyclesExcerpted from Warren Buffett Invests Like A Girl, And Why You Should Too: 8 Essential Principles Every Investor Needs To Create A Profitable Portfolio by LouAnn Lofton.
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