Tuesday, November 22, 2011

It’s A Woman’s World

From this weekend’s news (excerpt):

Why it pays to invest like a woman

DID you ever think testosterone could be a setback in successful investing, risk taking and trading among other aspects? According to a recent research, apparently too much of it is detrimental.

A man with an inlfated [sic] ego who asserts his alpha male dominance isn't a fantastic trader or investor.

The Motley Fool's Louann Lofton who authored the book: Warren Buffett Invests Like A Girl And Why You Should, Too, pointed out that psychologists and scientists concurred that women have the right temperament to help them achieve long-term success in the market.

In the book, Brad M. Barber and Terrance Odean of the University of California (Davis and Berkeley campuses, respectively) published a groundbreaking study on gender differences in investing in their February 2001 Quarterly Journal of Economics paper, “Boys Will Be Boys: Gender, Over-confidence, and Common Stock Investment.”

By surveying 35,000 discount brokerage accounts over a six-year period, Barber and Odean found several distinct differences in temperament and performance between men and women.

Their paper showed that men tend to be over-confident in their “manly” pursuits. Men tend to think that they know more than they actually do while women are willing to admit that they don't know everything.

How does this issue of over-confidence translate into successful investing?

Over-confidence often causes men to trade more than women. What does frequent trading do to one's investment results? Its 90% effort for very little gains [sic]. It drags returns, runs up commission fees and ruins good investment decisions.

Barber and Odean found that men traded the stocks in their accounts 45% more than women did. This excessive effort reduced their net returns by 2.65 percentage points, compared with 1.72 percentage points women eroded in their trading accounts. Single men were the worst offenders, trading 67% more than single women.

The women interviewed in the article were skeptical, though I think they missed the point. In any case, that men tend to take greater risks isn’t exactly news. There’s quite a bit of research in this area, for example (excerpt):

Financial Crisis Has Biological Roots, Too

Successful stock traders may be physically prone to hormonal excess — a physiology that leads to success on fast-paced trading floors, but also to a global economy steered by hormonally imbalanced decision makers.

In a study of 44 London traders, the most successful tended to have longer ring fingers than index fingers, a ratio linked to high prenatal exposures to androgen, a male sex hormone. This exposure in turn is believed to increase adult testosterone levels.

By favoring ultra-aggressive hotheads, the financial world may be throwing a human-sized wrench in its own gears.

"Trading is a physical activity, requiring physical traits. Traders have to engage in visual motor scanning, and react quickly when a price discrepancy pops up," said neuroscientist John Coates of the University of Cambridge, lead author of the study and former Wall Street trading-desk operator.

"We’re looking at how the market selects, and what it’s selecting for. It appears that it’s not selecting for rational expectations, but for biological traits," he said. If that’s the case, then our vision of the market as a rational, well-oiled machine is off the mark.

The slant here is slightly different. but just as interesting – success (read: greater risk taking) breeds greater responsibility and bigger trading portfolios in investment, and men tend to get better returns. When, that is, markets are good.

Putting it together, we have a possible biological explanation for irrational behaviour and bubble-bust cycles in financial markets. Time for women only trading desks?

1 comment:

  1. "I'm not a person who thinks the world would be entirely different if it was run by women. If you think that, you've forgotten what high school was like." --MADELEINE ALBRIGHT, former U.S. Secretary of State