Male investor brains are heavily influenced by one important factor: testosterone.
That means the majority of the time women are better at investing than men, a fact that might mean it's advantageous to have a female financial advisor.
Men make faster judgments and are less inclined to scrutinize facts to determine if they are accurate, according to a new study from Caltech, Wharton, Western University and ZRT Laboratory. Colin Camerer, a Caltech professor said the males made faster snap judgments and the "testosterone is either inhibiting the process of mentally checking your work or increasing the intuitive feeling that 'I'm definitely right,'" he said.
The two groups of men in the research study received either a testosterone gel or a placebo and received $1 for every correct answer and additional $2 if they answered all of the questions right.
The researchers found that the men who received the testosterone gel scored 20% fewer questions accurately than the ones who used the placebo.
The conclusion from Camerer is that confidence plays a key role and the more confident someone is, they tend to believe they are right and won't correct their mistakes as often.
One reason women make fewer trades could be related to lower testosterone, wrote Mitch Tuchman, managing director of Rebalance IRA in Palo Alto, Calif., in a recent blog post. A paper by Brad Barber and Terrance Odean at the University of California Berkeley in the Quarterly Journal of Economics discovered that men traded more often than women and the overconfidence can be expensive.
Trading too often can have detrimental results to your portfolio, Tuchman says.
"If you trade more, however, the averages tend to catch up with you," he wrote. "That has a real cost in terms of performance."
While losing 1% annually appears to be nominal, in a market where returns on a portfolio should generate 8%, a constant and continuous difference of 0.94% is close to a 12.5% returns gap each year, Tuchman said.
"Remember, too, that investments compound," he wrote. "Losses today, however small, mean you are missing money that no longer grows for you. A portfolio investment of $10,000 that generates 8% annual returns would become $100,627 over three decades. No additional saving, just compounding returns."
That same portfolio earning 7.06% turns into $77,414 and the gap is 23%.
"You end up with 23% less money just by trading more," Tuchman wrote.
Investors can opt to either seek out a female financial advisors or act "like a woman investor and choose to tamp down the nasty effects of testosterone on your retirement investments," he said.
Instead of buying individual stocks, investors can rely on highly diversified, low-cost index funds, Tuchman said.
"You jettison the extra cost trading built into most stock mutual funds and you eliminate the urge to buy and sell on your own," he said.
A study from Trinity College Dublin in Ireland indicates that the need to attain higher social status is a testosterone effect, said Patrick Morris, CEO of New York-based HAGIN Investment Management. Since the amount of money is one way to show a higher social status, the "risk-taking among males to achieve disproportionate success is another source of long-term underperformance," he said.
"So it appears that testosterone is bad in any environment that pays for a strong risk/reward discipline," Morris said. "Higher levels of testosterone can lead to riskier behavior. So the higher the testosterone, the higher the risk of each successive trade. Since each winning trade amplifies testosterone, the result is a series of wins followed by a big loss on a high risk, low probability trade."
One way to mitigate the issue is by learning to be aware of and respond to one's feelings differently, said Denise Shull, a former prop trader and trading desk manager and now the CEO of The ReThink Group, a New York-based performance consultant firm to hedge fund managers, traders and professional athletes.
"Men as a rule aren't taught how to double-check and in fact, are taught to ignore their feelings," she said. "Inserting the step of analyzing feelings has numerous benefits to men making risk decisions - not the least of which is slowing down the decision process."
Male traders who take this extra step have made dramatic improvements in their trading results, said Shull. "They trade less, have fewer incidents of overtrading, engage in less revenge trading and generally make better market decisions."
Female investors tend to outperform males over longer periods of time since males often are more aggressive and willing to take on more risk in their portfolios than women, said Tamra Stern, partner and director of wealth management at Main Street Research in Sausalito, Calif.
"Although this extra risk can bring higher returns to the portfolios in years when the markets are performing well, it also brings larger losses in years where the market is performing poorly," she said.
Portfolios can perform better in the long run by losing less during the market downturns, even though this appears to be counterintuitive. If a portfolio drops by 50%, it has to go up 100% to get even, which can take a long time, said Stern.
"If the portfolio goes down less, then it can recover quicker and begin to increase in value quicker," she said. "Women tend to take less risk in portfolios than men, mitigating the downside risk to the portfolios and allowing portfolios to recover quicker and participate sooner when the markets are doing well."
Instead of taking on additional risk by"swinging for the fences" and hoping that each stock purchase will be a "home run," investors should use stop loss orders to remove the emotions out of investing and lower equity exposure, Stern said.
Women tend to be better calculated risk takers who are less prone to being over confident and more likely to outperform, said Sara Brand, a general partner of True Wealth, an Austin-based venture capital firm. A report by the Centre of Entrepreneurs think tank with the support of Barclays Bank said 87% of women see themselves as financial risk takers, compared to 73% of men and 80% see opportunities where others see risk, compared to 67% of men.
While only 5% of money managers are female, they are able to outperform men in nearly every investment category and women hedge fund managers outperformed in every case whether it was one, three, five or six and half year periods, said Brand. Over the six-and-a-half year period women outperformed by 6%.
Women tend to "read more horizontally versus vertically" and are open to diverse topics, making them better investors, said Jillian Manus, a venture capitalist and managing partner at Structure Capital in San Francisco whose partners consist of two males.
"When you think of women and our reasoning, we pull research and data points from such an exponential set of data, which is horizontal in the process to what we think and how we complete tasks and not vertically the way men operate," she said.
The network of females are also more likely to more diverse and open, which increases a focus group's ability to help Manus assess a company.
"I will pull together a focus group that will comprise people not only women that are from Oxford or NYU -- I will pull women in from a yoga class that I attended or someone I sat next to on the airplane," Manus said. "It doesn't matter to me who they are, what they look like or where they've come from, if they have an interesting idea or recommendation, I'll use that. So in turn, a female's perspective is much deeper and wider and I think that is so important to future investment practices."
Men often seek investments or companies that mirror each other compared to women, who are "actually making a point in strategic and successful investments and we are open to hearing and exploring from many different sound boxes," she said. "Women investors venture as far their diversity of thought and openness to their collection of data."
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