After a particularly long meeting recently, my business partner Jarrett emerged looking a little worn out and proclaimed that he no longer wanted to work with male clients, just female ones. I laughed, knowing that he was joking, of course, since we have many male clients with whom we enjoy fantastic working relationships. But it is not the first time either of us has uttered something similar. He went on to describe the tone of the meeting and how the husband was extremely combative and defiant, towards both him and his wife, while discussing the potential need for help, specifically in the area of managing the couple’s portfolio. He felt he had been doing an admirable job of it, despite both the anecdotal evidence offered by his wife, as well as the empirical evidence of the performance numbers.
As Jarrett walked through some of our philosophies on behavioral finance and the pitfalls that can trip up the average do-it-yourselfer, the husband became more and more agitated, all while his wife was nodding in agreement, clearly recognizing many of the habits being described, which were likely causing problems. She understood that he had been falling prey to some of the more common traps and behavioral biases that tend to affect most of those investors who aren’t trained to recognize them (and even some who are), and that they were causing him to make ever larger mistakes with their portfolio. Loss aversion, recency bias, and overconfidence had infiltrated his actions, and even though she was not necessarily familiar with the specifics of those financial behavior traits, she realized that he was overreacting to volatility in the market, which, she believed, an advisor could help them deal with going forward.
We know that money issues are the root cause of a large percentage of domestic disputes, so it is not uncommon for spouses, who are seeking the advice of a financial advisor, to not exactly be on the same page when they come in. And one of the primary functions of any good advisor is to help couples work through, and hopefully be able to communicate about, these issues in a productive way – a way that will help lay a path towards achieving common financial goals. In this instance, my business partner was able to do just that, and the couple have since become valued clients. But this relatively recent experience led me to wonder about a question that has been asked before – are women better investors than men?
We know that behavioral biases, such as the ones referenced previously, regularly cause underperformance by investors. In a study by Vanguard titled “Advisor’s Alpha”1, that underperformance was estimated at roughly 3-4% per year, which falls in line with the annual Dalbar study2 measuring the annual underperformance of do-it-your-selfers vs those with an advisor. But we would expect that these biases would affect men and women investors equally. So the question becomes, are there other behavioral traits or biases that only, or at least more acutely, affect male investors, causing additional underperformance? According to a 1998 paper by Brad M. Barber of UC Davis and Terrance Odean of UC Berkeley titled “BOYS WILL BE BOYS: GENDER, OVERCONFIDENCE, AND COMMON STOCK INVESTMENT”3, the answer, it would seem, is an emphatic YES!
The behavior trait most responsible for the underperformance by male investors, it appears, is overconfidence. And the result, as concluded in the paper, is a nearly 1% per year reduction in returns for us boys. The paper attributes the majority of the loss to excessive trading, which has the effect of driving up costs, while subverting potential positive long-term returns due to impatience and a willingness to trade, even in the absence of adequate analysis to back them. Interestingly, according to additional research cited in the paper, despite the fact that they are hurting their own performance due to overconfidence, men actually have higher expectations of future returns than do women, to the tune of roughly 1% per year.
It’s hard to know if the conclusions in this research can account for the attitude Jarrett encountered in that meeting, or others like it, but I’m pretty sure there are plenty of advisors out there who have run into the same thing time and time again. Even so, it’s not immediately clear what, exactly, to do about it. But as advisors and counselors who are tasked with helping clients navigate the often-choppy waters of financial markets, the better understanding we have of the behavioral biases clients face, the more likely we are to be able to help them on their journey.
Oh, and guys…if you’d prefer not to lose a significant portion of your family’s hard-earned money, maybe it’s time to let the ladies take a turn at managing it. It seems likely that they’re better at it!