Gender Engendered Behaviour
A fool thinks himself to be wise,
but a wise man knows himself to be a fool— William Shakespeare
Do men and women make the same financial and investment choices? At first thought you may assume that the differences may arise from knowledge of financial markets. However it simply boils down to behavioural biases.
Studies, such as Financial Counselling & Planning Vol. 7: Why do women invest differently from men? and University of Pennsylvania: Are Women Conservative Investors? have found that women generally invest more conservatively and have a higher savings rate than men. Women save more than men across all depicted income groups. Over the years studies attempted to identify the reasons as to why this is so; they believe it can be attributed to differences in decision making pertaining to risk and confidence.
Nobel Laureate Daniel Kahneman, the author of Thinking Fast and Slow was once asked in an interview, about the one thing in the world he would eliminate; his answer? Overconfidence.
Overconfidence is so ingrained in our behaviour and mental models that it is extremely hard to circumvent. It causes us to overlook issues even when evidence suggests otherwise. Research shows that overconfident investors tend to trade excessively and that men are more overconfident than women in areas such as finance. Essentially the difference in overconfidence between both genders is most stark for traditionally-masculine-perceived tasks. Relevant studies include those of the American Psychological Association: Explanations of successful performance on sex-linked tasks and Personality and Social Psychology Bulletin: Gender Differences in Self-Perceptions.
The problem arises when this overconfidence is translated to investing. As we have shown in the past it is extremely difficult, if not impossible, to forecast the stock market’s future behaviour. Unfortunately the research also shows that people tend to exhibit the greatest overconfidence for difficult tasks — tasks which have low predictability and lack fast and clear feedback; these fall into the investing domain. As such, overconfident investors tend to overestimate their knowledge about the value of financial securities, believing their own assessments are more accurate than others. After accounting for the trading data of over 35,000 individuals the researchers found that men tended to trade 45% more than women and reduced their returns by 2.65% compared to if they had not traded for the year.
A study by Vanguard conducted on over 5 million investors also presented a similar story. Men tended to log onto their investment accounts more often than women and also traded more. Whilst their asset allocations were nearly similar, women were generally less risky in their allocations with less individual stocks and equity funds.
It appears that men could learn a thing or two about investment and savings habits from women. However, there are also implications for the investment behaviour of women. Given that there is still a persistent pay gap between men and women (albeit narrowing through the years) it is possible that the pool of savings and investments available for women at retirement could be substantially lesser than men. As such, women may not be able to reach their investment goals as they have a lesser pool of assets to begin with, and this is further exacerbated by the tendency to take smaller risks to allow those assets to grow to the desired level. For men, they would generally need to be more self-aware and avoid overreacting to market noise and news — in essence, to avoid rash decisions and try to stay seated during market turbulence.
At GYC, through comprehensive discourse with investors and our clients, we factor in the individual’s approach to financial decision making and customise a plan for them to achieve their goals. Through this, we are able to help investors manage their behaviour and emotions, ensuring they make the best decisions possible about their money, whatever the gender.
