How Men's Overconfidence Hurts Them as Investors

May 24, 2012

There was a great article in the New York Times last month: How Men’s Overconfidence Hurts Them as Investors. The data came from Vanguard, the king of index funds, and it offers a valuable message.

 

Among 2.7 million people with IRAs at Vanguard, the company found that during the financial crisis of 2008 and 2009, men were much more likely than women to sell their shares at stock market lows. Those sales typically meant big losses – and missing the start of the market rally that began a year ago.

 

Male investors, as a group, appear to be overconfident. There’s been a lot of academic research suggesting that men think they know what they’re doing, even when they really don’t. Women, on the other hand, appear more likely to acknowledge when they don’t know something – like the direction of the stock market or of the price of a stock or a bond.

 

Other studies have shown that while both sexes reduced their net returns through active trading, men did so by 0.94 percentage points per year. Short-term financial news often amounts to little more than meaningless “noise”. Men, far more than women, try to make sense out of this noise, and to no avail.

 

Selling volatile stocks in a down market – as male IRA investors did more often than women – might seem to protect a portfolio, but that isn’t necessarily so. Selling before the market falls and buying after it falls is the smart move. For long-term investors, though, the best strategy is to ignore short-term market movements by rebalancing a diversified portfolio on a periodic basis.

 

What explains these differences? Plenty of research suggests that aggressive risk-taking is a male-dominated genetic trait well-suited to the finding a partner or leading a tribe. It is not a trait well-suited to long-term investment success, that’s one of the lessons of the financial crisis.

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