Testosterone Is Not Destiny
There’ve been a lot of studies that indicate that women make better investors than men. They’re less inclined to overtrade, which reduces the fees they pay and means they start with an inbuilt advantage. However, there’s not been much analysis of why this behaviour occurs.
For it’s not self-evident that the lack of a pair of testicles should automatically make you a better investor. The pop-psychological view that this is due to surges of testosterone driving risk taking actions by red-blooded alpha males is highly seductive, but also pretty useless. Humans are uniquely evolved to allow us to override the urgings of of our genes, regardless of what sex organs they endow us with.
Cool Female Heads
However, there’s not much doubt that the basic finding – that women are less active traders and produce better returns on average over the long-term – is correct. Odean and Barber showed this in their 2001 study on overconfidence for instance. What’s more interesting, though, is how easily the idea that this is simply due to non-eradicable sex differences is accepted. In fact some observers have gone so far as to suggest that market extremes could be avoided by ensuring more women are present in investment houses – the idea being, presumably, that the cooler headed females will reduce the hot-headed male impulses to trade irrationally.
Like hell. More likely, of course, the presence of additional women would simply stimulate the men into ever more risky trades in feverish attempts to impress them: taking risks may have benefits that don't translate into pure financial advantage. Meanwhile any women interested enough to get involved in market trading are more likely to do so in order to become rich rather than to act as a self-regulating safety valve for their male colleagues.
Risky Sociobiology
Now before we can investigate this more we need to take a careful look at what causes sex differences. It’s perfectly obvious that our genes have fitted males and females differently for the purposes of reproduction but beyond that it’s surprisingly difficult to definitively tease apart the influences of genes and environment. Even the well known male map reading advantage can be traced to the greater willingness of parents to allow young sons to roam more freely. This environmental conditioning is nowhere more true than in the area of risk-taking.
The standard sociobiological view is that women are less likely to take risks than men because of their need to nurture and protect their children: a woman makes significant investment in each child and needs to carefully manage the risks associated with their upbringing. Men, on the other hand, are able to liberally cast their gametes around like some kind of agricultural sperm-spreader and are, therefore, less concerned about the risks associated with an individual child’s safety. Men are, in the parlance, rewarded for risk-taking and faithlessness.
Mum Doesn’t Know Anything
Although sociobiology has a lot of explanatory value there are significant reasons to be suspicious of this deconstruction of gender – none more so than the way it fits neatly into the majority world view of the roles of men and women. Moreover, the evidence of child psychology suggests that there are other powerful influences on gender related risk taking behaviour.
Child psychologists are amongst the most devious and cunning of their ilk, spending their lives devising clever methods of teasing out evidence of psychological development from children and their parents: when you're dealing with dumb babies and attached moms you've got to be pretty smart to get real evidence. One of the more eye-opening studies comes from analysis of how mothers treat babies of apparently different sexes.
As Lloyd and Duveen describe in their book, wittily entitled Social Representations and the Development of Knowledge, if you take a bunch of babies, randomly dress them as boys and girls, and stick them in a room with a bunch of mothers you get a bunch of completely predictable and quite remarkable results. The babies dressed as boys are bounced about, encouraged to behave aggressively and rewarded for exhibiting “male” risk-taking behaviours. Those dressed as girls are treated gently, expected to behave relatively passively and rewarded for exhibiting “female” risk-aversion behaviours. And the mothers don't recognise they're doing this.
Feminine Personality
In the face of such powerful environmental conditioning it’s impossible to separate out the genetic component of gender related risk-taking behaviour. The best we can do is to acknowledge that some element of this is likely to be due to upbringing. However, if that’s true it ought to be possible to see varying risk-taking behaviour – and relative returns – across the sexes, since traits associated with "feminine" risk-aversion won’t be determined by genes alone.
There’s not a whole lot of research around this – but one hint comes from the generally fringe investigations of personality traits. Personality psychology is mired in a whole bunch of problems, the most significant being that there’s no agreed underpinning theory that explains personality traits. Indeed the researchers often can’t even agree on what the traits are that they’re investigating without getting very annoyed with each other.
That said the evidence does show that empirically – experimentally – certain traits do seem to mildly correlate with certain behaviours, suggesting that there’s something going on under the covers even if we don’t quite know what. Most personality traits are operated as scales, so that individuals are more or less extrovert, more or less analytic, etc. In what's really a limited study, in terms of participants, Durand, Newby and Sanghani have looked at masculinity – femininity as a scale, associating more risk taking behaviour with the masculine end of the scale, regardless of the subjects' actual genders. Some women are inveterate risk-takers, some men avoid it like a plague.
Risk and Gender
The results suggest that investor return is correlated not with gender but with risk taking attitude: those people at the lower risk feminine end of the scale in general got better investment results than those at the masculine end, regardless of whether they were male or female. Encouraging women to join investment houses would probably simply add more risk taking women to the ranks. Of course the risk adverse feminine investor isn’t likely to be much interested in those kinds of jobs anyway.
All of which leads us to the not particularly startling conclusion that to reliably obtain the best returns possible we need to invest cautiously and avoid taking any risks that we can. The more active an investor you are the more opportunity you provide to exhibit irrational behaviour and the more money you donate to the investment industry. After all charity should start at home and shouldn’t involve enriching those already better off than ourselves.
Embrace Your Feminine Side
Trying to tease apart the relative effects of nature and nurture on anything is always and everywhere difficult but it's more important to recognise that our destiny doesn’t lie in our genes. We have a choice – to stay ignorant and allow nature to take its course or to educate ourselves and turn nature to our advantage.
The majority of people in the money business rely on our ignorance so we need to arm ourselves. Knowledge is power, caution is wisdom, to be feminine is to embrace wealth. It’s an irony, of course, that the world puts most of its money into the pockets of men and most of its financial wisdom into the minds of women. As a father of daughters it’s time we broke a few moulds methinks.
Related Articles: B.F. Skinner's Stockmarket Slot Machines, Don't Lose Money in the Stupid Corner, Technical Analysis, Killed By Popularity
There’ve been a lot of studies that indicate that women make better investors than men. They’re less inclined to overtrade, which reduces the fees they pay and means they start with an inbuilt advantage. However, there’s not been much analysis of why this behaviour occurs.
For it’s not self-evident that the lack of a pair of testicles should automatically make you a better investor. The pop-psychological view that this is due to surges of testosterone driving risk taking actions by red-blooded alpha males is highly seductive, but also pretty useless. Humans are uniquely evolved to allow us to override the urgings of of our genes, regardless of what sex organs they endow us with.
Cool Female Heads
However, there’s not much doubt that the basic finding – that women are less active traders and produce better returns on average over the long-term – is correct. Odean and Barber showed this in their 2001 study on overconfidence for instance. What’s more interesting, though, is how easily the idea that this is simply due to non-eradicable sex differences is accepted. In fact some observers have gone so far as to suggest that market extremes could be avoided by ensuring more women are present in investment houses – the idea being, presumably, that the cooler headed females will reduce the hot-headed male impulses to trade irrationally.
Like hell. More likely, of course, the presence of additional women would simply stimulate the men into ever more risky trades in feverish attempts to impress them: taking risks may have benefits that don't translate into pure financial advantage. Meanwhile any women interested enough to get involved in market trading are more likely to do so in order to become rich rather than to act as a self-regulating safety valve for their male colleagues.
Risky Sociobiology
Now before we can investigate this more we need to take a careful look at what causes sex differences. It’s perfectly obvious that our genes have fitted males and females differently for the purposes of reproduction but beyond that it’s surprisingly difficult to definitively tease apart the influences of genes and environment. Even the well known male map reading advantage can be traced to the greater willingness of parents to allow young sons to roam more freely. This environmental conditioning is nowhere more true than in the area of risk-taking.
The standard sociobiological view is that women are less likely to take risks than men because of their need to nurture and protect their children: a woman makes significant investment in each child and needs to carefully manage the risks associated with their upbringing. Men, on the other hand, are able to liberally cast their gametes around like some kind of agricultural sperm-spreader and are, therefore, less concerned about the risks associated with an individual child’s safety. Men are, in the parlance, rewarded for risk-taking and faithlessness.
Mum Doesn’t Know Anything
Although sociobiology has a lot of explanatory value there are significant reasons to be suspicious of this deconstruction of gender – none more so than the way it fits neatly into the majority world view of the roles of men and women. Moreover, the evidence of child psychology suggests that there are other powerful influences on gender related risk taking behaviour.
Child psychologists are amongst the most devious and cunning of their ilk, spending their lives devising clever methods of teasing out evidence of psychological development from children and their parents: when you're dealing with dumb babies and attached moms you've got to be pretty smart to get real evidence. One of the more eye-opening studies comes from analysis of how mothers treat babies of apparently different sexes.
As Lloyd and Duveen describe in their book, wittily entitled Social Representations and the Development of Knowledge, if you take a bunch of babies, randomly dress them as boys and girls, and stick them in a room with a bunch of mothers you get a bunch of completely predictable and quite remarkable results. The babies dressed as boys are bounced about, encouraged to behave aggressively and rewarded for exhibiting “male” risk-taking behaviours. Those dressed as girls are treated gently, expected to behave relatively passively and rewarded for exhibiting “female” risk-aversion behaviours. And the mothers don't recognise they're doing this.
Feminine Personality
In the face of such powerful environmental conditioning it’s impossible to separate out the genetic component of gender related risk-taking behaviour. The best we can do is to acknowledge that some element of this is likely to be due to upbringing. However, if that’s true it ought to be possible to see varying risk-taking behaviour – and relative returns – across the sexes, since traits associated with "feminine" risk-aversion won’t be determined by genes alone.
There’s not a whole lot of research around this – but one hint comes from the generally fringe investigations of personality traits. Personality psychology is mired in a whole bunch of problems, the most significant being that there’s no agreed underpinning theory that explains personality traits. Indeed the researchers often can’t even agree on what the traits are that they’re investigating without getting very annoyed with each other.
That said the evidence does show that empirically – experimentally – certain traits do seem to mildly correlate with certain behaviours, suggesting that there’s something going on under the covers even if we don’t quite know what. Most personality traits are operated as scales, so that individuals are more or less extrovert, more or less analytic, etc. In what's really a limited study, in terms of participants, Durand, Newby and Sanghani have looked at masculinity – femininity as a scale, associating more risk taking behaviour with the masculine end of the scale, regardless of the subjects' actual genders. Some women are inveterate risk-takers, some men avoid it like a plague.
Risk and Gender
The results suggest that investor return is correlated not with gender but with risk taking attitude: those people at the lower risk feminine end of the scale in general got better investment results than those at the masculine end, regardless of whether they were male or female. Encouraging women to join investment houses would probably simply add more risk taking women to the ranks. Of course the risk adverse feminine investor isn’t likely to be much interested in those kinds of jobs anyway.
All of which leads us to the not particularly startling conclusion that to reliably obtain the best returns possible we need to invest cautiously and avoid taking any risks that we can. The more active an investor you are the more opportunity you provide to exhibit irrational behaviour and the more money you donate to the investment industry. After all charity should start at home and shouldn’t involve enriching those already better off than ourselves.
Embrace Your Feminine Side
Trying to tease apart the relative effects of nature and nurture on anything is always and everywhere difficult but it's more important to recognise that our destiny doesn’t lie in our genes. We have a choice – to stay ignorant and allow nature to take its course or to educate ourselves and turn nature to our advantage.
The majority of people in the money business rely on our ignorance so we need to arm ourselves. Knowledge is power, caution is wisdom, to be feminine is to embrace wealth. It’s an irony, of course, that the world puts most of its money into the pockets of men and most of its financial wisdom into the minds of women. As a father of daughters it’s time we broke a few moulds methinks.
Related Articles: B.F. Skinner's Stockmarket Slot Machines, Don't Lose Money in the Stupid Corner, Technical Analysis, Killed By Popularity
It's not that we need to take on more risk or to work harder to avoid risk. It's that we need to learn better how to distinguish the risks worth taking from those not worth taking.
ReplyDeleteOur knowledge of how investing works is primitive. The single biggest thing holding us back is our pride. We like to pretend that we know more than we do. Keeping up the pretense closes the door to the investigation of new ideas.
Rob