Recently in the Wall Street Journal, MarketWatch columnist David Weidner noted that women “do almost everything better” than men — from politics to corporate management to investing.
Weidner cites a new study by Barclays Wealth and Ledbury Research, which found that women were more likely than men to make money in the market, mostly because they didn’t take as many risks. And why are they risk-averse? Because they’re not as overconfident as men, the study found.
The study’s findings backed up those of previous research on the topic: in a 2001 study [PDF] of 35,000 American households with an account at a discount brokerage, financial scholars Brad Barber and Terrance Odean found that women’s risk-adjusted returns beat men’s by 1% annually. A 2005 study by Merrill Lynch found that 35% of women held an investment too long, compared with 47% of men. More recently, in 2009, a study by the mutual fund company Vanguard involving 2.7 million personal investors concluded that during the recent financial crisis, men were more likely than women to sell shares of stocks at all-time lows, leading to bigger losses among male traders. It also meant fewer gains when some of the stock values began to rise again.
What’s the problem with men? “There’s been a lot of academic research suggesting that men think they know what they’re doing, even when they really don’t know what they’re doing,” John Ameriks, the author of the Vanguard study, told the New York Times.
The reason for that overconfidence may come down to biology, research suggests. There’s a growing field of study called “neuroeconomics,” in which scientists are examining the link between hormonal and neurological impulses and financial decision-making. One such recent study by John Coates, a research fellow in neuroscience and finance at Cambridge University, tested male traders’ hormone responses to workplace decisions. He found that testosterone — the stuff that makes men, well, men — surges during winning streaks. And that may drive both risk-taking and an attitude of infallibility.
The so-called “winner effect,” which has been seen in athletes during competition, also seems to apply to male traders. As the U.K.’s Guardian explained:
This occurs when two males enter a competition and their testosterone levels rise, increasing their muscle mass and the ability of the blood to carry oxygen. It also enhances their appetite for risk. Much of this testosterone stays in the system of the winner of a competition, while the loser’s testosterone melts away fast; in evolutionary terms, the loser retires to the woods to lick his wounds. In the next round of competition, though, the winner already has high levels of testosterone, so he starts with an advantage, and this continues to reinforce itself.
“Steroids,” Coates explains, “like most chemicals in your body, display what is called an inverted U-shaped response curve.” That is to say, when you have low levels of them you lack vitality, and do very poorly at mental and physical tasks. But as the levels rise you get sharper and more focused until you reach an optimum. The key thing is this, however: “If you keep winning, your testosterone level goes past that peak and sliding down the other side. You start doing stupid things. When that happens to animals, they go out in the open too much. They pick too many fights. They neglect parenting duties. And they patrol areas that are too large.” In short, they behave like traders on a roll; they get cocky.
Women, who have only 10% of the testosterone that men have, seem inured to the phenomenon, according to Coates. He is currently studying the small group of women who make their living on the trading floors of New York City — but because there are so few of them, he hasn’t amassed enough data to make any conclusions about the way their hormones and chemistry may affect behavior.
“We know that opinion diversity is crucial to stable markets,” Coates told the Guardian. “What no one talks about is endocrine diversity, a diversity of hormones.” It’s an unorthodox concept, but Coates believes it’s worth investigating.
So, basically, the more women around, the better, as the Journal‘s Wiedner said. His column referred to a recent book by Dan Abrams called Man Down: Proof Beyond a Reasonable Doubt That Women Are Better Cops, Drivers, Gamblers, Spies, World Leaders, Beer Tasters, Hedge Fund Managers, and Just About Everything Else. Wiedner wrote:
As Abrams notes, women are better soldiers because they complain about pain less. They’re less likely to be hit by lightning because they’re not stupid enough to stand outside in a storm. They remember words and faces better. They’re better spies because they’re better at getting people to talk candidly.
Of course, to most women none of this is much of a revelation.