ARE WOMEN BETTER AT THE INVESTING GAME?

 

(Cartoonist : Dave Whamond : Cartoonstock.com)

Investing and temperament go hand in hand with each other. All great investors are blessed with a great temperament. The dictionary meaning of the word temperament is ‘the combination of mental, physical and emotional traits of a person’. The legendary Warren Buffet has said that the most important quality for an investor is temperament and not intellect. He goes on to say that in investing, once you have ordinary intelligence, you need the temperament to control the urges that get most investors into trouble.

 

Do Woman have a better temperament?

 

In a paper published by Brad M Barber and Terrance Odean titled “Boys will be Boys: Gender, Overconfidence, and Common Stock Investment” they argue that women are, in fact, better at the investing game. Returns vary for both men and women. However, they vary more for men than for women. The paper is full of statistical models and related surmises. Actually most of the research paper deals with one human trait, and that is overconfidence. In fact it is almost repetitive.  In a nutshell they state that:

• Overconfident investors trade excessively. In general human beings are overconfident about their abilities, knowledge and forecasting skills. As a result of this, overconfident investors believe that their knowledge of a security is greater than it actually is. This results in such overconfident investors trading more than other rational minded investors.

• The paper then separates investors in to those who are more confident, and those who are less confident. They then proceed to test the two groups on the returns earned. The results show that the overconfident investors earn lower returns.

• Psychological studies show that men are more confident than women in  financial matters. This overconfidence leads to men trading more than women. It is well-known that excessive trading results in lower returns. Since women trade less, they generate higher returns. Hence, it seems they have a better investing temperament.

 

Are Women better at Investing than Men?

 

I was smirking even as I read the research paper. After I finished reading, I decided to do my own research. I found that there is a scientific basis for what is stated therein.  It seems that women have a different approach to investing as compared to men. I broke up the contents of the research paper, and analysed it on the following investing traits. These are, actually, the necessary attributes to becoming a successful investor.

Attitude towards investment advice – Women are better able to think for themselves

Women are more likely to seek investment advice than men. This is attributed to women having lack of investment confidence. This is self-inflicted.  Men, on the other hand, suffer from overconfidence. Most men think they are good at finance and women think the opposite. It seems that women not only seek more advice, they also research and understand their investments more than men. Moreover, men process information differently as compared to women. Women do approach investing in a healthier and calmer way. Women are better at handling pressure. Also, they also do not suffer from peer pressure (in so far as the investing world is concerned!!).

Risk Aversion & Optimism – Women hate risk

What is risk aversion. The definition is : ‘The reluctance of a person to accept a bargain with an uncertain payoff rather than another bargain with a more certain, but possibly lower, expected payoff”.  Women are known to be less optimistic as compared to men. This results in women taking lower risk. Overconfident investors also hold riskier portfolios than do rational investors.  Woman investors are less optimistic and overconfident as compared to men. Hence, it follows that they take lower risks while investing.

Trading Frequency – More number of Women think the long-term

Women trade less frequently than men. It is found that the trading turnover for men is nearly one and half times that for women. It is well accepted that excessive trading reduces returns. However it seems that the effect is more in the case of men. This is tested by partitioning investors on gender. Another finding of the report is that securities that an investor buys subsequently under perform those that they sell. Hence it seems overconfident investors also have horrendous timing. Men tend to trade on little information, and are willing to act when they are wrong.

Performance –  Women perform better

Investments made by women perform better, are more persistent and more consistent than those made by men. This is attributed to the same traits of risk aversion, overconfidence and trading frequency. The overconfidence applies mostly to the stock selection process. In short men are more confident of their stock predictions than women. It seems that men spend a lot of time on predicting targets. They also hold unrealistic beliefs about how high their returns can be. Men also expect greater out performance as compared to women. It seems that men spend more time and money on security analysis, rely less on brokers, make more transactions, believe that returns are more highly predictable and anticipate higher possible returns than do women. This results in them spending too much time, effort and money in the pursuit of their goals.

 

Women As Investment Professionals

 

There are very few women in the field of investment and fund management. For some strange reason finance is perceived to be a task which is in the male domain. This leads us to the current situation where men are disproportionately represented in the financial industry. In another research paper titled ‘Sex Matters: Gender and Prejudice in the Mutual Fund Industry’ published by Alexandra Niessen-Ruenzi and Stefan Ruenzi the question that is asked is ‘Why are there so few women in the financial industry’ . The reasons given are as follows:

• It seems that investors are prejudiced against women in finance. This leads to lower inflows into funds managed by women. Hiring woman is less lucrative for Asset Management Companies, since they generate lower assets to manage.

• The funds managed by women grow at a slower pace than those managed by men. However, the fund performance is found to be more consistent in case where there are women as managers. Women as fund managers are known to follow more stable and reliable investment styles. In other words, fund returns of male managed funds are more variable as compared to those funds which are managed by women. On the other hand, returns from funds managed by women, are seen to be more consistent. Hence, past performance is a better indicator of future performance for funds which are managed by woman.

 

Does Warren Buffet Invest like a Woman?

 

For the uninitiated, Warren Buffet is the worlds most successful investor. He is known for his value picks and tremendous success in the investing world. There is book titled  Warren Buffet Invests like a Girl : And Why You Should Too. It is written by a young woman by the name of Louann Lofton. After Warren Buffet read the book, he invited the young woman for brunch. Just to put matters in the correct perspective, in 2007  a fund manager by the name of Mohnish Pabrai bid $ 650000 at a charity event, just to have the pleasure of having lunch with Warren Buffet. That is what a meal with Warren Buffet is worth!! The video below where the young woman is promoting her book  is a must watch: