The Psychology of Investing: Are Women Better Investors Than Men?
By Margaret Hamar, Women’s Investing and Wealth Coach
It’s 2012 and women have come a long way in terms of empowerment and making their mark in the world. Yet there are still women out there who believe they have less knowledge and confidence than men when it comes to money and investing. I still find this surprising. Perhaps I live in a different world to the one they live in as I do not hold this view.
What a lot of women are not aware of is the amount of solid research studies showing that women are excellent investors. Even more crucial is that it seems the majority of women have certain traits that place them in a strong position to be very successful investors.
In the area of trading for instance, there is a vast amount of research that actually shows that men and women differ in their investing results in that women have better long term results than men. Many studies indicate that the majority of men and women differ in terms of risk aversion, overconfidence, their focus on long term and short term goals, and their anger and fear reactions when things go pear shaped. All these factors have been found to have a differing effect for men and women in terms of judgement and financial decisions when investing.
Probably the most widely publicised research in this is area is the 2001 study by Barber and Terrance, Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment. In the area of trading, women were found to trade better and have better long term results than men. Of course men are also brilliant investors, however the “majority” of men were found to reduce their net returns by about 1 percentage point a year than the “majority” of women.
Men were more likely to take on more risk and hold riskier portfolios which were less likely to produce positive results whereas women took on less risk. Moreover, the majority of men in the study were more focused on short term results whereas women were more focused on long term results and so women also have better long term investing results than men.
A 2005 report by Merrill lynch, and a most recent, 2011 study by Barclays Capital and Ledbury Research also found that the majority of women had higher returns when investing in the long term.
Barber and Terrance found that these differences were mainly a result of men tending to be ‘overconfident’. Barber and Terrance stated that “overconfidence is a simple and powerful explanation for the high levels counterproductive trading in the financial markets.”
Basically overconfidence is the tendency to place an irrationally excessive degree of confidence in ones abilities and beliefs. As a result an overconfident investor will rely more on their personal assessment of an investments outcome rather than the actual market facts and valuation of the investment. The end result is unrealistic beliefs about their returns and how these will be estimated.
A study in December 2009 by Vangard, the Mutual Fund company, also had similar findings: during the 2008 and 2009 Financial Crisis men were more likely to trade and at the wrong time. John Ameriks, one of the researchers in this study, told the New York Times in March 2010 that male investors tend to be overconfident and academic research suggests that men may think they know what they’re doing, even when they really don’t know what they’re doing. Women are more likely to acknowledge when they don’t know something.
Anger and fear have also been found to affect financial decisions and outcomes. A Nationwide survey at the University of Oregon in March 2012 just days after the Dow bottomed at 6547, indicated that when things go wrong men are more likely to get angry and then go for riskier investments and take bigger losses. In contrast when things go wrong women are more likely to be fearful and pull back and lay low for a while. Women were concerned but took fewer hasty actions.
With all the evidence about women’s strengths with investing it is time to put to rest the beliefs that women have less knowledge and confidence than men when it comes to money and investing.
Margaret Hamar has a passion for empowering women to create wealth through investing. Financial disempowerment is a major drawback hindering women to empower themselves in other areas of their life and Margaret’s life journey has led her to have a passion for empowering women in the area of financial empowerment and wealth creation.