Price on Value

Boys will be boys—even in the stock market

John Price,  Ph.D.

On your marks, get set, go! And they are off in the investing race between the sexes.

First let’s 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 area.

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 don’t 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 author.”

“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 significantly, better.

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 than women.

Another finding is that all the differences described above are more pronounced between singe men and single women.

What is the moral? I can’t 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 markets: overconfidence.”