Sunday, 3 October 2010

Psychology of the investor

Girls, did you know you have what it takes to be a successful investor? 

That's because there are the three key psychological traits that, when it comes to making the savviest investment decisions, trip men up every time. If you'll excuse some over-generalising and stereotyping, these are

Attitude to risk
Men are less risk averse than women and will back portfolios that are more uncertain. They’re more likely to put all their eggs in one basket instead of opting for a safer, more diverse portfolio. Men’s higher earnings and greater net worth also makes it easier for them to take greater risks than women. A US study by Wang in 1994 also showed that women are more likely to be offered safer options than men, by advisors who expect them to be risk-averse.

Overconfidence is consistently found in more men than women, research shows. And this is especially true in male-dominated arenas such as finance. They overestimate the returns their investments will bring and the certainty of the return. They also have a misjudged overconfidence in the accuracy of their own knowledge and over-rate their own ability. In a Gallup study, both men and women expected their portfolios to outperform the market but men expected theirs to outperform it by a greater margin.

The herd instinct
Constantly monitoring the market can fuel men’s over-activity and cause them to act irrationally. Men are more likely to get drawn into financial follow-my-leader games and information cascades. They also fall foul of being too well informed, instead of tuning out the endless stream of news and financial information and sticking to an annual portfolio review.

This is where women truly have the edge, We have a healthier attitude to risk, are not ridiculously over-confident and don’t play herd games.

Sadly though, lamentably few women are seriously into investing. Male investors outnumber females by eight to one. A mere 3% of hedge funds are headed by a woman. 

Simonne, who has a predominantly female clientele, says women could do with borrowing some of that male over-confidence. “Many women have exactly what it takes to reach dizzy financial heights,” she says, “the only thing holding them back is knowing that they have it and acting on it.” 

Perhaps it really is time for the Sheconomists to step forward?


  1. Hi, With the usual caveats about there being a big overlap, I am sure this male/female difference exists as it has been highlighted before. Whether or not it is possible to alter behaviour, I wouldn't like to say.

    It's not just about risk, though. Anecdotally, I see a significant difference between male and female finance blogs. On the whole, women seem more interested in saving money via craft and thrift activities while men prefer to discuss ways of getting returns on money. I am not sure whether this is a real difference or just a preference for different blogging topics. -SG

  2. I agree - in my experience with clients, men are usually more excited about maximising investment returns whereas women are more interested in managing the family budget.

    You just have to take the financial services industry as an example and look at how male dominated it is. I worked for one firm where the ration of male to female advisers was 58:2!


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