Published June 27, 2012
Gone are the days when women were advised to invest for the future by finding a husband. Despite the gains in gender equality over the past century, though, men and women have not quite achieved parity in the field of investing.
Today, the investing gap between the sexes stems either from inborn tendencies or cultural expectations around gender and money. In many cases, it's unclear whether the discrepancies begin in nature or nurture. Either way, men and women have distinctly different outlooks and orientations.
Over the past two decades, researchers have confirmed what hacky comedians have known forever: Men don't like to ask for directions, and women like to do everything in the company of other women.
Those fundamental stereotypes show up in the ways the sexes approach learning about investing. Men tend to enjoy learning on their own, whereas women prefer a group setting, researchers Tahira Hira and Cazilia Loibl found.
Their research is detailed in the "Handbook of Consumer Finance Research."
"Men are more self-directed learners, using the Internet more than women," says Loibl, CFP, an associate professor in the Department of Consumer Science at Ohio State University. "Women rely more on personal networks with friends, family (and) financial planners, and (they) take a networking approach to gathering information. Both sources have the positive and negative, and then when we analyzed it to find out if the investment outcomes were different, we couldn't find any difference."
Hira and Loibl concluded that there could be an advantage to teaching men and women financial literacy differently.
"There was a time when I would say, 'We don't need to have separate courses for men and women. It's not like we are going to teach them different things,'" says Hira, CFP and professor of personal finance and consumer economics at Iowa State University. "But this research taught me: It is the learner that is different, and the learner's way of learning is different. The difference is between how men and women prefer to learn."
Women, it turns out, enjoy learning together in a nonjudgmental setting while "men will find the information on their own and go ahead and make a decision based on that," Hira says. "They really don't need much validation from someone else, relatively speaking."
Much like Goldilocks and the three bears, investors can have too much confidence or too little confidence. The in-between is just right. As it turns out, men veer toward overconfidence while women tend to be less so, behavioral finance researcher Meir Statman found.
Some overconfidence can be a good thing. It gives you the push needed to make decisions and execute them. Being wildly overconfident can backfire, though.
"In the stock market, where so much of it is random, trying to do better than average is more likely to get you results that are below average. This really is where all the confidence is going to hurt you," says Statman, a professor of finance at the Leavey School of Business at Santa Clara University and author of "What Investors Really Want: Discover What Drives Investor Behavior and Make Smarter Financial Decisions."
Overconfidence is related to trading excessively and taking too much risk. The other side of the coin is taking too little risk due to lack of confidence.
When it comes to investing for the long term, taking risk is not a luxury. Insecure investors can hamstring their results by investing too conservatively, nearly as much as their gung-ho counterparts could do by excessive trading and risk-taking.
"When you put it in fixed investments, you are not protecting yourself against inflation and taking advantage of the opportunities to grow," says Hira.
Whether male or female, average investors tend to make somewhat dubious decisions.
In now-famous 2001 research by Brad M. Barber, professor at UC Davis, Graduate School of Management, and Terrance Odean, professor at UC Berkeley Haas School of Business, the researchers found that overconfidence leads men to trade excessively. As a result, their returns suffer more than women's.
But women also buy and sell securities indiscriminately; they just do it less, so their performance doesn't suffer as much.
Both genders seem to make mistakes when it comes to picking the securities to be bought or sold. Barber and Odean found that the stocks men buy underperform the ones they choose to sell by 20 basis points per month. Stocks bought by women underperform those they sell by 17 basis points per month.
The genders have many more similarities than questionable judgment in securities selection, though. In fact, they are more similar than different in most respects.
"The overlap is much greater than the extreme, so there are a lot of women who are more overconfident than men," Statman says.
To improve investing outcomes, investors should learn to identify their own inherent tendencies, strengths and limitations.
"All of these cognitive errors are things that you can identify, and even if it is difficult, you can act against them. The same applies to emotions. You might find yourself fearful, but you stop and ask yourself if that fear is reasonable," says Statman.
If you find yourself investing only in the safest and lowest-yielding options available, consider taking a course on investing in the stock market or speak with a financial planner to help you gain some confidence.
Similarly, if you never met a trade you didn't like, think about the person on the other side.
"If I think it will go up, why is that fellow on the other side willing to sell it to me thinking it will go down?" Statman says.
Knowing where your weaknesses lie can help you avoid mistaking them for strengths. And that can only lead to better investing decisions.