Editors' pick: Originally published Sept. 14
There is a saying among investors: "There are old traders, and bold traders, but there are very few old bold traders."
The idea is that young investors are more likely to make bold moves, and because of their aggressive trading techniques, are likely to have short careers. It is common to see young traders, especially men, "blow up" early on and lose vast amounts of money, effectively ending their careers.
There are two key things to notice: All these traders were male; and they were all younger than 40 when they made huge losses through reckless trading.
The first point shouldn't be a shock, as women are generally under-represented in the financial world, especially on the trading floors of investment banks.
Just 15% of investment bank traders are female, according to financial employment website eFinancial Careers.
So it should be no surprise that there are no famous women rogue traders.
Although it is true that most traders are men, studies have shown that women make better investors.
In one study, fund company Vanguard looked at the trading decisions made by the owners of 2.7 million retirement accounts from early 2007 to October 2009, right at the peak of the financial crisis.
The study found that men were 10% more likely to cash out at a loss and miss out on the eventual mean reversion rally.
In a 2001 study titled, "Boys Will Be Boys: Gender, Overconfidence and Common Stock Investment," researchers analyzed the trading patterns of a large discount brokerage firm and the investing behavior of more than 35,000 households in its client base.
They found that men traded stocks 45% more often than women. Although extra trading wasn't good for either gender's performance, trading reduced males' net returns by 2.65 percentage points a year, while it reduced women's net return by just 1.72 percentage points.
Too much trading is directly linked to poor investment performance.
Not only do fees and other trading costs add up, but traders also have a tendency to buy after prices have gone up and sell when prices are falling or have already fallen. This is known as the dumb money effect.
Also, studies have shown that men are more likely to ignore trading or investment strategies.
In a simulation run by Financial Skills, a trader profiling company, men broke specified trading rules 2.5 times more often than female traders did.
Men tend to have too much confidence, often thinking that they "have the game figured out" and thus trade more often.
As with most ingrained investor habits, biology has to take part of the blame. Humans are hard-wired by evolution to make bad investment decisions that end up losing money.
The problem is that life is very different than it was 100,000 years ago, but our primitive instincts are the same.
The involuntary chemical responses and adrenaline rush that protected our ancestors from saber-toothed tiger attacks now kick in when we make investment decisions. But now this biochemistry can wreak havoc on our investment plans instead of saving our lives.
And if we want to point the finger at one particular hormone for causing untold damage to male investment behavior, look no further than testosterone. Women do have some testosterone, but men have about seven to eight times more.
Too much testosterone can lead to aggressively confident behavior. That is the sort of characteristic needed by a hunter-gatherer to protect his clan from dangerous beasts, but on the modern trading floor, it can cause a lot of damage.
For eight straight days, John Coates, author of The Hour Between Dog and Wolf (Penguin Books, 2013), took saliva samples from 17 male traders, once in the morning and once in the afternoon.
He found that on the days traders earned more than their daily average income, they had higher levels of testosterone.
Coates suggested that traders get addicted to the euphoria-inducing "winners effect."
Early success makes young male traders, who already have the highest levels of testosterone that they will ever have, more aggressive, less rational and more dogmatic.
And this continues until they experience a major trading loss and stop "winning."
But once they reach 35, male testosterone levels start to decline. By 60, the average man has 30% less testosterone than a male in his early 30s.
This means that trading decisions are less influenced by hormones. Instead of going for the big score, older traders have a different goal: live to fight another day.
Besides his altered biochemistry, the older trader also has more experience under his belt. He has seen the damage caused by overconfidence and has learned to temper his aggression.
Having seen colleagues "blow up" or having taken a bad loss or two himself, he has been humbled by the experience.
After living through a few unpredictable, adverse black-swan events, the veteran trader usually knows that anything can happen, so it is often better to not be too aggressive and overconfident.
Regardless of age or gender, the key thing to remember is this: Don't confuse skill with luck and get overconfident. It is too easy to underestimate risk and very hard to trade one's way out of trouble.
So, unlike the trading firms that didn't have rules in place to control their rogue traders until it was too late, investors need safeguards to prevent massive losses.
This means having an investment strategy and the discipline to adhere to it. This also includes rules to keep position sizes from getting too big, to avoid over-trading and to cut losses before they get out of control.
That is how one can survive and become a successful and old investor.
For more about the emotions that get in the way of investment decisions, and what to do about them, download this free report.