Maybe the Academy Award-nominated film Wolf of Wall Street that depicted the seedy, greedy male-dominated world of finance has triggered all the recent banter about whether men or women make better investors.
While everybody has an opinion, hard research has sorted out a wide range of differences in investor behavior by gender, with many studies citing similar results. Quantifiable research on returns is just the start.
The cornerstone study by Brad Barber and Terrance Odean involved 35,000 households from a large discount brokerage. It showed that men trade 45% more than women, to their detriment; it reducing their net returns by 2.65 percentage points per year. Trading by women reduced returns by only 1.72 percentage points. The finance professors are from University of California, Berkeley and University of California, Davis.
Bottom line: Trading less and making more thoughtful investment decisions led to women making more money. Therefore, women rule.
Reasons for the conclusion really have nothing to do with IQ, or level of education, or even years of experience. It all boils down to one, major biological difference: Men produce, on average, 15 times more testosterone than women.
Aside from obvious physical effects of the hormone, it is linked to increased aggression, dominance, confidence, hostility, risk-taking behavior, etc.—which can all explain why John Mars’ book Men Are from Mars, Women Are from Venus sold 50 million copies.
While these traits can present communication gaps between men and women, they can also have big effects on investment decisions, researchers say.
Here are five ways:
Men Get Angry, Women Become Fearful
The University of Oregon surveyed investors nationwide in March 2009, just days after the Dow Jones Industrial Average bottomed out at 6,547. The survey revealed that men that men tend to react to the down market with anger. This causes them to invest in riskier investments to make up for the loss, which only results in more losses.
In contrast, the Oregon researchers found that women reacted to the down market with fear, causing them to become conservative, hold tight and take fewer hasty actions. Females were twice as likely to expect the return on stocks over the coming year to be zero or negative and to think stocks would return 5% or less per year over the next 10 years.
Men are Spontaneous, Women are Objective
Women tend to think more objectively about their investments and base what they buy or sell on relevant facts, studies show. This emotional disconnect allows women to sell a losing stock. study of investor behavior by LPL Financial found that research is important to women; they tend to do more of it before making investment moves. Women ask questions before investing; men tend to be more spontaneous in their buying and selling.
Men, however, are less likely to admit to making a mistake, causing men to hold on too long. Many say that because women are less confident with investing, they want to research and understand before they take action.
Men Ignore GPS, Women Ask for Help
Men are not only more likely to ignore directions given to them by a car’s GPS, they’ll probably argue with the female voice as well. Women may listen to the GPS and get a second opinion from a gas station attendant.
The same behavior is borne out in investment, experts say. Women are more likely to assess the situation, seek out assistance and consult advisors. Men are more likely to be overconfident and rely more on their own personal assessment of the market as opposed to the actual market facts and valuations. Doing so often leads to even bigger losses.
Egos Drive Men, Goals Drive Women
Men see the world as a competitive place, and often make decisions based on wanting to “one-up” a peer. It’s all well and good to boast about finding a great stock and pocketing profits, but the need to validate can get in the way of making wise choices. Big winning trades are great, but big losing days can deplete an account.
The research on investor behavior shows women are much more likely to push ego aside, stick to an investment plan and focus on personal goals.
Men Crave Risk, Women Need Safety
There are many parallels between men and women when it comes to behavior around investments and cars. According to LeaseTrader analysis, 95% women listed safety performance as their biggest concern when shopping for cars, followed by 94% being interested in the accident history of the car. Men, on the other hand, tended to focus more on thrills, aesthetics, technology and speed.
The same process can be applied to financial decision-making. A Boston Consulting Group study confirmed that the competitive and thrill-seeking behavior of men means they are more focused on short-term investing gains. Focused on safety and longer-term goals, women tend to more patient before investing.