By Nelli Oster, PhD, Director and Investment Strategist, BlackRock Multi-Asset Strategies Group
A meme widely available on the Internet parodies the differences in how men and women approach shopping decisions:
Decisions about buying pants, however, aren't the only decisions that the genders generally approach differently. Behavioral finance researchers have found that the genders tend to differ in how they approach investment decisions as well.
In this post, the latest in my series on ways women and men investors behave differently, I drill down into the research behind gender-related differences in investment decision making, answering three key questions.
Q: Why do women and men make different investment decisions?
A: There are three broad ways in which men and women differ when it comes to financial decision making:
- Women tend to focus more on longer-term, non-monetary goals.As this Fidelity investment guide lays out, women generally associate money with security, independence and the quality of their and their families' lives. According to a 2010 Boston Consulting Group study examining women's experiences with wealth management providers, women tend to focus on longer-horizon planning, like college savings. Men, on the other hand, who tend to be more competitive and thrill-seeking by nature, often focus on the short-term track records of their portfolios.
- Women tend to be thorough and take more time to make decisions than men. Several studies, including a national survey by LPL Financial, show that women tend to research investments in depth before making portfolio decisions, and the process, as a result, tends to take more time. Women also tend to be more patient as investors and consult their advisors before adjusting their portfolio positioning, whereas men are more prone to market timing impulses. To gather information, women often prefer group discussions to men's more independent learning approach.
- Women seek help more. A 2012-2013 Prudential study on women investors reveals that women are more receptive to financial research and advice than men. They often require more of a financial advisor's time and resources, but once trust is established they are also more loyal clients with their focus on lasting relationships.
Q: What impact can these different investment decision making styles have on portfolios?
A: There are some potential pitfalls both men and women can watch out for. Women's tendency to think in terms of qualitative longer-term goals (known as 'mental accounts') can lead them to separate money earmarked for different purposes into different investment accounts. This, in turn, can result in inefficient portfolio allocations overall. Similarly, women who are overly concerned about financial security may predominantly focus on downside protection and not take enough risk in their portfolios, subjecting them to insufficient income in the future.
While women risk missing out on some investment opportunities in taking more time to make decisions, men's generally higher impatience when it comes to seeing good investment returns makes them more prone to attempt market timing, and to get hurt when timing is off. For example, a Vanguard study on individual investor behavior revealed that during the financial crisis of 2008 to 2009, women were less likely than men to sell out of equities.
Finally, women's generally lower confidence levels and consensus-driven approach -as revealed in BlackRock's Investor Pulse survey-may put them at a disadvantage, as good investment returns often require some degree of contrarian thinking. Men with their more individualistic approach may, on the other hand, be more prone to the confirmatory bias. In other words, they may discard information that conflicts with their existing knowledge, and be slow at cutting loss-making positions and taking advantage of capital losses for tax purposes.
Q: What can men and women do to mitigate the detrimental impact of their decision making tendencies?
A: Both men and women should make sure that their investment styles and horizons match their overall financial goals. For women, this may mean taking on more risk. For men, this may mean focusing more on longer-horizon goals, rather than on short-term trading track records.
Women may also want to review the efficiency of their investment allocations across their portfolios to counter the negative impact of mental accounting. In addition, they may want to consider attending financial education seminars to help boost their lower confidence levels and ability to make timely, well-informed investment decisions.
Meanwhile, to help avoid snap decisions and market timing impulses, men may benefit from implementing a systematic investment strategy and a periodic, rather than continuous, review of their accounts and rebalancing. Finally, to counter confirmatory bias, men may want to consider becoming a bit more open to professional financial advice.
Nelli Oster, PhD, is a Director and Investment Strategist in BlackRock's Multi-Asset Strategies Group. She holds a BSc (Hons) in Management Sciences from the London School of Economics and a PhD in Finance from the Stanford Graduate School of Business, where her dissertation focused on behavioral finance. You can find more of her posts here.