In the fine tradition of lazy Summer vacations, usthrift blog takes a break from policy today to talk about more important things — like the mysterious differences between men and women. But, don’t despair — it’s in the context of savings!
In his bestselling book Men are From Mars, Women are From Venus, psychotherapist John Gray uses extended metaphors and hyperbole to describe some basic psychological differences between men and women. When men face a problem they tend to “retreat to the cave” where they sort out their problems in solitude. Women “go to the well” where they find other women and emotional support. Women and men bring different emotional and psychological tool kits to try to fix the tough problems that life throws at them. And in our modern world of houses and running water, rather than caves and wells, how to invest your hard-earned money is one of the more important and persistent problems many people face. How well you handle it will have enormous consequences for your financial well-being and even more basic than that, your happiness. And chances are, if you are woman, you go about this task with considerably more effectiveness than men — even if you don’t realize it.
Men have two psychological characteristics that play havoc on their ability to invest money. First, they are overconfident in their own ability. This is not a characteristic confined to finance. They are overconfident in their ability with regards to almost anything. Evolutionary psychologists, those who study how our thinking patterns have evolved over time, have speculated that this tendency towards overconfidence arose because of the tasks men performed in early human societies. Men hunted, and when hunting it improves your survival chances if you are very confident when face-to-face with a wild animal. Today we each face the market rather than wild animals. But, unlike the hunt, men’s overconfidence often dooms them in this situation. They tend to trade stocks more actively because they are convinced they know what the next hot stock will be, what is likely to go up and what is likely to go down. In so doing they incur all of the transaction costs associated with trading (commissions, taxes, bid-ask spreads) but do not pick stocks any better than the woman in the office next to theirs. That woman will typically be less confident in her own abilities, including finance, trade stocks less often and in so doing generate risk-adjusted returns that are superior to her male counterpart. Even in the more sedate world of mutual fund investing, women seem to have a better ability to pick good funds because they concentrate on the fees a fund charges rather than what fund happens to be hot at any given moment. And so we have what amounts to a stark paradox in investing: Men think they know what they are doing but often don’t and women think they don’t know what they are doing but often do.
We all know the stories about the guy who won’t stop to ask for directions and the woman who changes her mind at the drop of a hat. When similar situations occur in our own lives we look to these stories to convince ourselves that what we are observing is just normal behavior. These gender-specific stereotypes exist partially because there is some kernel of truth buried in a perhaps-humorous story. Men are, in fact, stubborn and protective of their belief that they are knowledgeable about a particular subject, in this case how to get somewhere. Women do, in fact, change their minds more often than men. But the interesting part of this tendency to change their minds is why it occurs. It happens because women are better than men at listening to the thoughts and advice of others and changing their own views in light of those thoughts. If you never listen to anyone else, it’s pretty clear you aren’t going to change your mind very often. That is true whether you think you know where you are going, and can’t bear the thought that someone at the gas station will tell you that you were wrong, or whether you are facing a decision about how to plan for your financial well-being in retirement. Women are more likely to listen to and act on financial advice than men. If a company has a retirement planning seminar for their employees we can be very confident of two things. Women will think they need the seminar more than men will. Women will be more likely to use in the information obtained in the seminar to make better financial decisions.
So, are women just better investors than men? Yes, they are. Women bring an emotional and psychological tool kit that is better adapted to decision making in modern financial markets. They listen, consider alternatives carefully, change their minds when necessary and generally lack the hubris that leads men astray.