Do you invest like a girl?> It s not your typical playground taunt. In fact, it turns out, it s not a taunt at all. Our culture generally doesn t like to think or talk about gender differences. (Or, rather, it does but then it likes to beat itself up as sexist for having done so.) But the economic and social-science literature when it comes to finance is rather clear: Men and women behave differently, with women on average exhibiting less confidence and less willingness to take risk. Whether this difference is primarily caused by innate gender differences or by culture is quite a pickle to pull apart. But the impact of these gender differences isn t that hard to discern. Women, on the whole, seem to be slightly more rational investors than men.
From this, however, some have extrapolated that the current global financial crisis could have been reined in or averted entirely with one simple fix: more women in finance. Here the prospects are a bit more doubtful, but still worth exploring.
Why do women and men invest differently? Is confidence good or bad when it comes to investing? Is risk aversion innate or is it malleable to the social circumstances?
The most recent data point on why men and women invest differently comes from a new paper by Christer Gerdes and Patrik Gr nsmark of Stockholm University, looking at differences in play between male and female expert chess players. Chess has become something of a hot new way to study behavioral economics, in that there are vast amounts of data available and because each move in chess represents, in the words of one study, a well-defined problem environment, with a fixed number of identifiable moves. Chess also has the benefit of a gold standard, the so-called Elo rating, which allows for a relatively objective measure of player skill (Garry Kasparov has the highest Elo rating ever measured).
Looking at a database of 15,000 players at expert level or above, over 1.4 million games, the researchers looked at male and female players propensities to play risky or safe strategies. What they found was that even when controlling for age, Elo rating, and other variables, women were two percentage points more likely to play it safe than male players.
This may sound like a rather small difference, but small differences add up over a career playing chess or over years of investing. Take the results of a 2001 study on male and female amateur investors. Drawing from data on more than 35,000 households at a large discount brokerage firm during the 1990s, economists Brad Barber and Terrance Odean looked at the rationality of male and female investors.
Assuming that investors who traded more were overconfident (believing overly in their capacity to anticipate stock moves), they found, essentially, that the more female-influenced stock decisions were, the more rational they were. Men, in general, traded far more than women but single men traded far more than single women. Relatedly, married men traded much less than single men but still far more than married or single women.
The cost of all this extra trading? While men s and women s actual stock picks didn t perform all that much differently (despite the men picking riskier stocks), the transaction costs from all those trades meant that men reduced their returns by about one percentage point more than women (and roughly one-and-a-half percentage points more for single men versus single women). The average annual cost for the most active traders according to the study s authors: about $3,000 a year.
So, when it comes to your household finances, it seems there s a pretty decent case for letting the wife take the wheel or at least for her to look over the husband s shoulder. But does this translate into a lesson for the economy at large?
There s some evidence that companies with a lot of women in senior management outperform other companies. But correlation isn t causation, and it could just be that more forward-looking companies are also generally more adaptable and on-the-ball. The data is so-far more intriguing than definitive.
How about the idea that more risk-averse women would calm down some of the boys-club, casino culture in the financial industry? Again, the idea s more intriguing than it is supported by evidence. It could be that a greater female influence would temper some of the risk-junkie tendencies of Wall Street. But the causation here could also run the other way: In other words, it could be that finance simply attracts big risk-takers, male or female.
What s more, it could be that the more women enter finance, the less risk-averse women in finance will become. A new study of the Nepalese banking industry, by Binay Kumar Adhikari of the University of Alabama, Tuscaloosa, finds that women in the industry are more risk averse than men. However, it finds that this difference in risk aversion may be caused by women having a lower estimation of their own knowledge about finance than men have of their own.
If women s greater risk aversion does indeed have its roots in their lack of confidence in finance, a high-finance girls club could eventually grow just as bad and reckless and dangerous as the current boys club.
And that s what we call equality.
Ryan Sager writes the blog Neuroworld at TrueSlant.com.>