On your marks, get set, go! And they are
off in the investing race between the sexes.
First lets go back a bit and look at
the competitors. There are a range of studies by psychologists
looking at the differences between the ways that men and
women tackle problems.
For a start, it is documented that men have
higher opinions of their abilities than women. This is particularly
true if feedback is absent or ambiguous. Given that this
is the nature of feedback in the stock market, then it is
likely that men will act more confidently than women in
This is verified by a 1977 study by Wilber
Lewellen and others published in the Journal of Business.
The study concluded that men rely less on brokers, believe
that returns are more predictable, and anticipate higher
possible returns than do women.
I regularly get anecdotal support for these
differences in my investing workshops when I talk about
the importance of recording why you bought a particular
stock. If you dont record the reasons,
I explain, there is the danger of taking credit for
an astute selection when a stock goes up, even if it was
bought totally on the recommendation of a broker, or magazine
In the other direction, I continue,
if a stock goes down, there is the tendency to blame
the market and not take responsibility for the
decision. My impression is that men, more than women,
recognize that they have acted this way in the past. In
other words, compared to women, men take too much credit
for their successes and tend to dismiss their failures.
Against this background, Brad Barber and Terrance
Odean at the University of California in Davis studied the
investment records of 35,000 households with accounts held
at a large discount brokerage firm. The study covered the
years 1991 to 1997. They were interested in the relationship
between overconfidence as displayed by men and women and
its impact on market performance.
The first finding was that men trade more
often than women. Men turn their portfolios over by 6.4
percent each month (or 77 percent annually) while women
turn their portfolios over by 4.4 percent each month (53
percent annually). How does your trading activity compare
with these figures?
The next finding is that there is no significant
difference between the quality of their stock selections.
This is a bit more complicated to explain, but it is measured
in terms of excess returns as compared to their own benchmark.
Barber and Odean started by calculating the
return that would have been earned if the portfolio held
at the beginning of the year was kept for the entire year.
This is the benchmark. Next this benchmark is compared to
the actual return for the year. If this is positive, then
the trading for the year improved the annual profit. If
it was negative, it reduced the profit.
Guess what? Both groups would have done better
if they held their start-of-the-year portfolios for the
entire year. In general, the stocks individual investors
sell earn greater returns than the stocks they replace them
with. The stocks men choose to purchase underperform those
they choose to sell by 20 basis points per month. For women,
the figure is 17 basis points per month. Slightly, but not
Now we can put these two findings together
to reach the final conclusion. Women are superior to men
in the stock market. Not because their individual buy or
sell decisions are better, but because they trade less often.
There is also a difference between men and
women in the type of portfolios they are likely to hold.
In the four areas of portfolio volatility, individual stock
volatility, beta, and size men invest in riskier positions
Another finding is that all the differences
described above are more pronounced between singe men and
What is the moral? I cant do better
than give Barber and Odean the final word by quoting the
last paragraph from their study. Individuals turnover
their common stock investments about 70 percent annually.
Mutual funds have similar turnover rates. Yet, those individuals
and mutual funds that trade most earn lowest returns. We
believe that there is a simple and powerful explanation
for the high levels of counterproductive trading in financial
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