Women invest differently to men. Or so the popular wisdom goes. ‘Greatest investors of all time’ lists contain no women. There are some notable exceptions, but Wall Street and the City are predominantly boys clubs. The environment is either repellently male, irretrievably sexist or women are just no good at investing.
Are women more risk averse? Received opinion is that women are more risk averse. This is not a baseless assertion. There is plenty of research to back it up. Women tend to be more concerned with losses, trade less often and seek to protect what they already have. The attitude has become so engrained that even Arianna Huffington, one of the most influential women in the world, espouses it. The prevailing view on Wall Street is that greater risk means greater returns. Therefore, risk averse females are worse investors by design.
Oestrogen, or sexism?
Female risk aversion – if true – may not, of course, be a biological imperative. There is something to be said for women suffering a gender inequality feedback loop: smaller salaries means smaller investments means greater aversion to risk. Women live longer, meaning their returns have to stretch correspondingly further, which logically tends to greater risk aversion – risk is necessarily short-termist. However, there being no women in the ‘greatest investors of all time’ lists can patently be seen as a result of sexism rather than natural traits. Not only are women on Wall Street subject to obvious prejudice, but may themselves shy away from the kind of alpha-male ‘boys club’ that less macho men are equally put off by. On a private investment level, such as individual Forex trading, anecdotal evidence suggests many women naturally delegate financial decisions to their partners, believing they will be better equipped for it thanks to engrained social attitudes that Warren Buffett would rightly call ‘brainwashing’.
Testosterone and ‘irrational exuberance’
But are men really that much better? Recent work by Wall-Street-trader-turned-neuroscientist John Coates pinned the financial crash of 2008 on excess testosterone from bullish male traders.
Coates’ research indicates that a surfeit of testosterone translates into an excess of risk. In a bull market this very often turns into higher returns, but can easily go too far – success breeds the ‘winner’s effect’ which produces more testosterone, creating a feedback loop of male hormone and ‘irrational exuberance’. In a bear market, cortisol – the ‘stress hormone’ – leads men to get out too quickly, before they’ve properly thought through their decision. The study concludes that placing more women, and older men, into high frequency trader positions would help smooth out the very human effects of these hormones and encourage greater long-termism, less susceptible to the vagaries of the day-to-day market. Women and older men have less testosterone, and women tend to produce cortisol in situations of social, rather than competitive stress, meaning they should be less panicked by market downturns than men.
Are women actually better at investing?
The neuroscience is sound, but what happens in the real world? Recent studies on performance of women angel investors and women-led hedge funds have shown women to consistently outperform their male counterparts. This may partly be down to exactly the risk aversion that is usually portrayed as a disadvantage.
According to LouAnn Lofton, author of Warren Buffett Invests Like a Girl – And Why You Should Too, this gender trait leads women to spend more time researching their investments and to hold on to them longer – the classic buy and hold strategy favoured by the fourth richest man in the world.
The tendency amongst women to trade less also saves on fees. Over the long term, these relatively small amounts add up. Women don’t necessarily have to make smarter choices to fare better than men. Patience alone can outperform a hyperactive male counterpart, staring down dwindling margins in the face of excessive trading.
Stereotypes are stereotypes
The evidence for women being better investors – and arguably better for the economy whilst doing so – is certainly compelling. But as Helaine Olen, writing for The Guardian, points out, there are cases of female fallibility in investment. Morgan Stanley’s Mary Meeker acquired the nickname ‘Queen of the Net’ for her role in pumping up the disastrous dotcom bubble at the turn of the century.
And what of those studies scientifically proving women’s aversion to risk? Julie Nelson, professor of economics at the University of Massachusetts-Boston, put a dozen such studies under the microscope and found the differences between men and women were either down to over-interpretation (read: finding the conclusions the researchers wanted to) or problems in methodology. So perhaps women aren’t better investors. And perhaps they aren’t naturally risk averse. Either way, it looks like women are as good as men at investing, if not better, and sometimes just as bad. There’s certainly nothing to show otherwise. With so few women in the field – in large part perhaps due to cultural bias more than anything – it’s hard to say. At the very least, more women should be given the chance to show what they’re made of. As Buffett wrote in Fortune: “We’ve seen what can be accomplished when we use 50% of our human capacity. If you visualise what 100% can do, you’ll join me as an optimist about America’s future.” And that goes for the rest of the world too.
Amy Fry writes for a range of business and finance topics which include trading, investments and budgeting on behalf of GoMarkets.