By Justin Waring, UBS Investment Strategist Americas
In 1992, a relationship-counseling book by John Gray—titled Men are from Mars, women are from Venus—became a national bestseller. One of the ideas that the book promotes was that men and women "keep score" of their relationship value, and that conflict arises from their different scoring methodologies.
According to the book's author, John Gray, women assign a higher "value" to small things (i.e. demonstrations of affection) that men tend to discount heavily in favor of big things.
One interpretation of this thesis is to say that men think that they can maintain the relationship by focusing on helping to solve "big-ticket" issues that are important, banking "relationship credit" and then spend that credit getting out of other responsibilities.
The book was popular, but also heavily criticized for promoting stereotypes for each of the genders. A similar popular concept has been promoted in the investing world.
In a cleverly-titled paper, "Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment ," behavioral finance researchers Brad Barber and Terry Odean looked at 35,000 households and analyzed the trading behavior and investment results for male and female investors.
Their headline conclusions support a view that men are overconfident, trading their accounts far too often. This 'overtrading' cost the men's net returns about 2.65% per year, and women earned about 1% more per year.
On the surface, this supports the "Men are from Mars, Women are from Venus" hypothesis. However, even though the data showed that men trade about 45% more often than women on average, this doesn't mean that they're the only investors displaying overconfidence. The women studied were also hurt by their trading, to the tune of 1.72% per year.
We should be careful not to oversimplify the takeaways from studies like this. Stereotypes aren't useful for making individual decisions—after all, no one is average . The researchers stressed that the ~1% difference in the genders' average returns was not statistically significant, so there isn't a distinct difference in the quality of the trades, only the quantity. It should also be noted that much of the headline differences were due to a small pack of extreme male overtraders that particularly suffered due to their overconfidence.
Based on this study—and others looking at the subject—we can conclude that trading is very difficult, and hazardous to your wealth; and that more frequent trading increases the likelihood and size of underperformance.
Both hypotheses are easy to confirm after a few minutes playing this simple Market timing game. However, this actually understates the issue for two reasons. First, as we illustrate in our Bear market guidebook, the gains of a well-diversified strategy are even more durable—and therefore more difficult to time—than an all-equity strategy.
Second, much of the cost of overtrading in this study was a result of trading costs. Even if you're sure that your trade will add value, you must also take transaction fees and other frictional costs into account. Even if they weren't better at making decisions, this factor alone favors outsourcing active decisions to professional managers and favoring a flat percentage fee over transaction-based costs.
Last, but not least, we need to look beyond stereotypes to find truth. The investing behavior differences between men and women aren't as large as they appear. Both trade more than the mythical 'rational' investor, who trades only after a careful analysis concluding that the expected return outweighs the costs. And both are penalized when they overtrade their accounts.