Sexism and the City

Hair-Trigger Traders

It’s long been known that women make better investors than men, although frankly that’s not a particularly difficult thing to do as most of us males have the patience of a small child with a full bladder and a tendency to hair-trigger trading for all sorts of behaviourally induced reasons. However, what’s a bit more surprising is that this difference is seen in professional investment circles as well while at the same time biases against female fund managers ensure they have less money to manage more wisely.

Behind all of this appears to be a basic bit of brain processing evolved to make sure we bond tightly to our social groups and to regard outsiders, en-masse, as strange and potentially dangerous. As so often in investment, though, if we stick to our basic stereotypes we blind ourselves to opportunity.

Risk-Adverse Women

There’s been lots of research on gender differences in investing, most of which comes to the same conclusion: women are less risk-seeking than men. Moreover this finding appears to be robust against a variety of situational behavioral biases, such as framing and familiarity. A variety of reasons for this difference have been advocated, but the general trend can be ascertained from this study by Powell and Ansic:

“Females would have a lower risk preference if they have a greater desire for security, and males a higher risk preference if they have a greater desire for returns. As females are less risk propensive, they tend to focus on strategies which avoid the worst situation to gain security.”

So it’s all in the genes then? Well, maybe. This wouldn’t matter much if it didn’t make a difference to trading returns but as we’ve seen before it does. Here are Barber and Odean from a study of on-line trading habits:

“We document that men trade 45 percent more than women and earn annual risk-adjusted net returns that are 1.4 percent less than those earned by women. These differences are more pronounced between single men and single women; single men trade 67 percent more than single women and earn annual risk-adjusted net returns that are 2.3 percent less than those earned by single women.”

The researchers ascribe the difference to male overconfidence, although that may just be another way of describing that men are inveterate risk-seekers. Either way the results are clear-cut, men trade more – much more – and make lower returns.

Gender Bias in Investment Management

As Nissan and Ruenzi have shown in Sex Matters: Gender Differences in a Professional Setting these risk-seeking variations carry over into the investment industry: female investment managers are more risk-adverse than their male colleagues and tend to stick closer to benchmarks and their own investment styles. Although they also find there are no significant differences in investment returns between the sexes they also note that women achieve greater performance persistence – which is another way of saying that they don’t tend to be amongst the outliers of great success or great failure.

Given that there are essentially no differences in returns between male and female managers you’d assume that there’d be no difference in the relative amount of funds under management but, of course, you’d be wrong as the researchers find that women only attract half the funds that men do. Which leads them to pose the provocative but interesting question: this being the case, why do fund managers bother employing women at all?

Stereotypes Galore

The reason appears to be simple, if not particularly edifying: female fund managers overwhelmingly work for the largest and oldest fund companies. These companies are more likely to be the target of anti-discrimination lawsuits, to be probed on diversity by large clients and, of course, are attractive to risk-adverse managers, aka women. Overall the researchers suspect that the reason for the differences is basic stereotyping by both investors and managers, leading to women getting less attractive funds to manage and receiving lower inflows of cash.

The idea of a “stereotype” is prevalent in psychology, where it’s viewed as an aspect of the implicit categorisation that we all do, unconsciously and automatically, all the time. It’s particularly favoured as an explanation of in-group/out-group differences where members of the out-group are more often depicted in stereotypical terms. At the very least it seem to be a cognitive short-cut which enables us to thread our way through the complexities of life without needing to sweat all the details.

Bias on Wall Street

The downside of this is that we tend to carry our stereotypical categories over into our everyday lives and partly this seems to be about the way that men and women are differentially depicted. As Madeline Heilman puts it:

“Men are categorized as aggressive, forceful, independent and decisive, whereas women are characterized as kind, helpful, sympathetic, and concerned about others. Not only are the conceptions of men and women different, but they are often seen as oppositional, with members of one sex seen as lacking what is thought to be most prevalent in members of the other sex.”

The impact of this in the workplace is generally pretty straightforward – women are less successful and earn less money than equivalent men. Higher echelon jobs are usually categorized in male terms – to be a leader you need to be aggressive and forceful. In those rare cases where a woman succeeds in a male stereotyped position she’s usually seen as breaking the mould, which results in negative reactions. Heads you lose, tails they win.

Given this it’s perhaps not surprising to find similar tendencies on Wall Street, where researchers have shown that women are outnumbered six to one in securities analysis. However Gender and Job Performance: Evidence from Wall Street doesn’t find any evidence of gender bias but suggests a different reason: women prefer not to take these jobs.

Preferences or Stereotypes?

Now preferences are another tricky area for psychologists. They’re not easy to measure as we discussed in Investors, Embrace Your Feminine Side. This may be because they’re hard to analyse but a lot of psychologists suspect that it’s actually because of a rather more fundamental problem: they don’t exist. So imputing that women prefer not to work in the highly paid world of investment management because they’d rather be swabbing blood soaked floors in hospitals or taking dictation from an "important" man is not something that we should accept without raising an eyebrow. Or two.

It may be that women prefer to avoid these jobs due to the demanding hours, lack of work-life balance and male locker room environment because of innate preferences or it may be down to the implicit gender bias in these environments. Meanwhile if the original research quoted in this article is right women are likely to get worse jobs even if they do work in the industry. Heads you lose …

Break the Mould

To summarise, it seems that the investment industry is rife with gender bias – although it’s no different from most industries in this regard – and it rather looks like our innate stereotyping mechanisms are behind this. We regard money management as a male preserve and regard successful women as odd and dangerous creatures to be avoided. In reality if we want our money managed conservatively with the minimum of fuss and risk we should seek out female fund managers. On the other hand, if we like to see our net worth changing rapidly then a red-blooded male’s the best choice: just don’t bet on the direction of net worth change being in a positive direction.


Related articles: Investors, Embrace Your Feminine Side, Get An Emotional Margin of Safety, Darwin's Stockmarkets