How Lower Testosterone Helps Women Investors Outperform Their Male Counterparts

NEW YORK (MainStreet) — Nicole Cotty works at an insurance company in Connecticut. Although the 39-year-old invests the maximum in her company 401(k) plan, the claims adjuster also invests outside her retirement plan in American Century mutual funds.

Her choices in mutual funds have reaped returns of 9.44% over the past ten years. “I am more of a buy-and-hold investor,” Cotty told MainStreet. “I am classified as moderate in terms of risk profile.”

Although less confident than men about investing, women are far wiser at investing than they are aware of.

Investors who aren’t overconfident trade less and less trading equals stronger returns,” said Meredith Jones, founder of MJ Alternative Investment Research. “Women also tend to constantly evaluate their holdings to ensure that they are still fundamentally strong and fit in with their overall investment thesis.”

Men trade 45% more than women, which results in women earning a full percentage point more in returns, according to data from Terrance Odean, a professor at Berkeley's Haas School of Business. “Women tend to trade less than men because they are less overconfident,” Jones told Mainstreet. “They do not believe that every buy and sell idea they have is a good idea. They tend to spend more time evaluating the data and the investment thesis.”

In addition considerations of lacking overconfidence, the feeling of hope or lack thereof can also play a role in financial choices.

“People with strong hopes for certain financial outcomes make lower-risk investments and while that’s often a good thing, it could work against goals in some situations,” said Martin Reimann, assistant professor of marketing at the University of Arizona’s Eller College of Management.

And just like over confidence, too much hope can backfire.

“If an investor feels that reaching a nest egg is a given, they may invest too conservatively and end up under saving,” Reimann told MainStreet. “On the flip side, feeling too strong a threat could induce a kind of gambling mentality that also doesn’t serve long-term financial goals.”

What makes men more confident or hopeful than women when it comes to investing is, in some cases, pure biology.

“Testosterone contributes to this phenomenon with testosterone levels increasing when a contest is started and the winner getting an additional dose of testosterone if they are the victor,” said Jones, who authored Women of the Street: Why Female Money Managers Generate Higher Returns (Palgrave MacMillan 2015). “This additional boost helps to account for the next win as the increased testosterone boosts physical prowess, persistence and fearlessness.”

Lower testosterone minimizes this winner’s effect, which can lead to reckless behavior.

“As a result, women investors tend to be better at admitting mistakes than men and exiting a position while it is still just a mistake rather than a disaster can help minimize drawdowns,” Jones said.

While a drawdown is simply a decline in an investment or fund, minimizing such a scenario is important, because it is harder to come back from than most investors realize.

“For many people, losing money is uncomfortable and unpleasant and incredibly undesirable and it can have serious repercussions on financial health,” said Jones.

For example, to recover from a 5% loss, an investor must earn back 5.3% and to recover from a 25% loss an investor needs returns of 33%.

“The numbers get larger from there,” Jones said.

Written by Juliette Fairley for MainStreet

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