Home / Opinion / Women investors are confident, not overconfident

Finance and investments are generally considered masculine areas. A cursory look at the proportion of women in the finance profession as compared to, say, teaching or information technology, tells the story. However, careful academic research has established that women are more suited for stock trading than men. The chief differentiating factor between the two genders is the level of overconfidence in matters pertaining to finance. Women have been found to be less overconfident than men in this area. Hence, women are able to avoid a significant number of unnecessary trades that men would have made and thereby limit their potential losses.

Professors Brad M. Barber and Terrance Odean in their widely cited research paper titled Boys will be Boys: Gender, Overconfidence and Common Stock Investment, investigate the trading differences between men and women. The data required for this analysis was provided by a large discount broker in the US. They have analyzed the trading records of more than 35,000 retail investors over a period of six years. They find that the trading turnover of men is 45% more than that of women. Such high trading turns out to be counter-productive. Active traders are significantly better off holding their beginning-of-the-year portfolio. More importantly, the paper shows that men, due to overtrading, underperform women traders by an economically and statistically significant 0.94% a year. The number is significant given the low level of interest rates prevalent in the US.

To establish their point more clearly, the authors divide their sample into four categories: single men, single women, married men and married women. If the hypothesized difference between men and women exists, then the difference in performance should be more stark between single men and single women as compared to the difference between married men and married women.

As expected, the difference in performance between single men and single women turns out to be a highly significant 1.44% a year. In this category, the trading turnover of men turns out be 67% higher than women. In short, women who are less likely to be influenced by men outperform by a significantly higher margin when compared to women who are likely to be influenced by men. The reverse is true for men.

The authors in this study appeal to the findings in psychology literature to explain their results. A number of studies have shown that in general both men and women tend to overestimate their professional capabilities. Such overestimation tends to be higher in areas where the feedback is noisy. Professors K. Deaux and E. Farris in their 1977 paper show that men claim more ability than women in areas that are perceived to be masculine, such as finance and investing.

This writer, in his earlier profession as an insurance seller, has witnessed decision making with respect to investing in several thousand Indian families. Even educated and working women hesitate to take independent decisions in this area. Women themselves perceive that they lack the expertise required to make independent investment decisions.

Legendary investor Peter Lynch echoes a similar view in his bestseller One Up On Wall Street. He refers to husbands as “designated investors" in a family. He cites the case of a friend who decides to invest in companies such as Winchester Disk Drives and Havalight Photo Cell without knowing a thing about the business these companies are into. The designated investor completely disregards his wife’s cautionary advice; and as expected, ends up losing his shirt. In contrast, some of the best picks of Lynch were a result of his wife’s advice. Hanes, a stockings company, which he bought on his wife’s advice, turned out be a multi-bagger many times over.

It is important to note that research has not proven that women are better stock pickers than men. It is not the case of this article that women are superior or more knowledgeable about finance and investing. It is possible that men have more information about stocks simply because of higher level of exposure and education. Among retail investors, both men and women do equally badly. In fact, a number of studies have shown that, on an average, stocks sold by retail investors outperform the stocks bought by them. Wealth usually flows from retail investors to institutional investors. In this aspect, there is no difference between men and women. However, women tend to be more modest about their own perception of their abilities when compared to men. Men, on the other hand, with inflated perception of their ability, tend to indulge in excessive trading, which proves to be disastrous for their trading performance.

It is time that women understand that they bring a very useful element to the table when it comes to investing and financial planning. Most great investors agree that the softer aspects of investing are difficult to acquire when compared to the more difficult aspects such as information or analytical skills. Women seem to possess a natural advantage with respect to softer aspects.

This writer has benefited immensely in his personal investments by using these research findings. I advice other “designated advisers" to involve their better halves in financial decision making. Women would do well if they stop blindly following instructions and show some interest in financial matters. After all, it is the entire family that benefits from the increased wealth.

Prasanna Tantri is associate director of Center For Analytical Finance, Indian School of Business.

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