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Saturday 21 August 2010

Sexism and the City

Hair-Trigger Traders

It’s long been known that women make better investors than men, although frankly that’s not a particularly difficult thing to do as most of us males have the patience of a small child with a full bladder and a tendency to hair-trigger trading for all sorts of behaviourally induced reasons. However, what’s a bit more surprising is that this difference is seen in professional investment circles as well while at the same time biases against female fund managers ensure they have less money to manage more wisely.

Behind all of this appears to be a basic bit of brain processing evolved to make sure we bond tightly to our social groups and to regard outsiders, en-masse, as strange and potentially dangerous. As so often in investment, though, if we stick to our basic stereotypes we blind ourselves to opportunity.

Risk-Adverse Women

There’s been lots of research on gender differences in investing, most of which comes to the same conclusion: women are less risk-seeking than men. Moreover this finding appears to be robust against a variety of situational behavioral biases, such as framing and familiarity. A variety of reasons for this difference have been advocated, but the general trend can be ascertained from this study by Powell and Ansic:
“Females would have a lower risk preference if they have a greater desire for security, and males a higher risk preference if they have a greater desire for returns. As females are less risk propensive, they tend to focus on strategies which avoid the worst situation to gain security.”
So it’s all in the genes then? Well, maybe. This wouldn’t matter much if it didn’t make a difference to trading returns but as we’ve seen before it does. Here are Barber and Odean from a study of on-line trading habits:
“We document that men trade 45 percent more than women and earn annual risk-adjusted net returns that are 1.4 percent less than those earned by women. These differences are more pronounced between single men and single women; single men trade 67 percent more than single women and earn annual risk-adjusted net returns that are 2.3 percent less than those earned by single women.”
The researchers ascribe the difference to male overconfidence, although that may just be another way of describing that men are inveterate risk-seekers. Either way the results are clear-cut, men trade more – much more – and make lower returns.

Gender Bias in Investment Management

As Nissan and Ruenzi have shown in Sex Matters: Gender Differences in a Professional Setting these risk-seeking variations carry over into the investment industry: female investment managers are more risk-adverse than their male colleagues and tend to stick closer to benchmarks and their own investment styles. Although they also find there are no significant differences in investment returns between the sexes they also note that women achieve greater performance persistence – which is another way of saying that they don’t tend to be amongst the outliers of great success or great failure.

Given that there are essentially no differences in returns between male and female managers you’d assume that there’d be no difference in the relative amount of funds under management but, of course, you’d be wrong as the researchers find that women only attract half the funds that men do. Which leads them to pose the provocative but interesting question: this being the case, why do fund managers bother employing women at all?

Stereotypes Galore

The reason appears to be simple, if not particularly edifying: female fund managers overwhelmingly work for the largest and oldest fund companies. These companies are more likely to be the target of anti-discrimination lawsuits, to be probed on diversity by large clients and, of course, are attractive to risk-adverse managers, aka women. Overall the researchers suspect that the reason for the differences is basic stereotyping by both investors and managers, leading to women getting less attractive funds to manage and receiving lower inflows of cash.

The idea of a “stereotype” is prevalent in psychology, where it’s viewed as an aspect of the implicit categorisation that we all do, unconsciously and automatically, all the time. It’s particularly favoured as an explanation of in-group/out-group differences where members of the out-group are more often depicted in stereotypical terms. At the very least it seem to be a cognitive short-cut which enables us to thread our way through the complexities of life without needing to sweat all the details.

Bias on Wall Street

The downside of this is that we tend to carry our stereotypical categories over into our everyday lives and partly this seems to be about the way that men and women are differentially depicted. As Madeline Heilman puts it:
“Men are categorized as aggressive, forceful, independent and decisive, whereas women are characterized as kind, helpful, sympathetic, and concerned about others. Not only are the conceptions of men and women different, but they are often seen as oppositional, with members of one sex seen as lacking what is thought to be most prevalent in members of the other sex.”
The impact of this in the workplace is generally pretty straightforward – women are less successful and earn less money than equivalent men. Higher echelon jobs are usually categorized in male terms – to be a leader you need to be aggressive and forceful. In those rare cases where a woman succeeds in a male stereotyped position she’s usually seen as breaking the mould, which results in negative reactions. Heads you lose, tails they win.

Given this it’s perhaps not surprising to find similar tendencies on Wall Street, where researchers have shown that women are outnumbered six to one in securities analysis. However Gender and Job Performance: Evidence from Wall Street doesn’t find any evidence of gender bias but suggests a different reason: women prefer not to take these jobs.

Preferences or Stereotypes?

Now preferences are another tricky area for psychologists. They’re not easy to measure as we discussed in Investors, Embrace Your Feminine Side. This may be because they’re hard to analyse but a lot of psychologists suspect that it’s actually because of a rather more fundamental problem: they don’t exist. So imputing that women prefer not to work in the highly paid world of investment management because they’d rather be swabbing blood soaked floors in hospitals or taking dictation from an "important" man is not something that we should accept without raising an eyebrow. Or two.

It may be that women prefer to avoid these jobs due to the demanding hours, lack of work-life balance and male locker room environment because of innate preferences or it may be down to the implicit gender bias in these environments. Meanwhile if the original research quoted in this article is right women are likely to get worse jobs even if they do work in the industry. Heads you lose …

Break the Mould

To summarise, it seems that the investment industry is rife with gender bias – although it’s no different from most industries in this regard – and it rather looks like our innate stereotyping mechanisms are behind this. We regard money management as a male preserve and regard successful women as odd and dangerous creatures to be avoided. In reality if we want our money managed conservatively with the minimum of fuss and risk we should seek out female fund managers. On the other hand, if we like to see our net worth changing rapidly then a red-blooded male’s the best choice: just don’t bet on the direction of net worth change being in a positive direction.

Related articles: Investors, Embrace Your Feminine Side, Get An Emotional Margin of Safety, Darwin's Stockmarkets


  1. Risk-taking doesn't provide good investment results. But risk-taking does provide good marketing results. I think that is the core problem.

    Marketing always appeals to the emotions. Risk-taking appeals to the emotions.

    How do you make good investment returns sexy? People say they want them. But people are drawn to Get Rich Quick every time. We buy the convertible even though we know it doesn't make sense for us.

    The industry is happy to sell us what we want to buy. And to hire the people best able to provide it.

    We don't want good investment returns. Not really. Good investment returns are not emotionally satisfying.


  2. Hi Rob

    Risk-taking doesn't provide good investment results. But risk-taking does provide good marketing results. I think that is the core problem.

    That's a perceptive point: remember how the fund industry will manipulate survivorship data to make historic returns look more favourable. But they're just capitalising on human nature: we eat too much and save too little, because we're evolved from a world where surviving until tomorrow was the definition of success and thirty was old age. But, of course, we do want good investment returns: we're just not prepared to wait for them.

  3. "risk-adverse" should be "risk-averse"

    Aside from that, good piece. The challenge in investing is not whether to take risk or not, but finding places where are paid to take the risk.

    And yes, the women are often better at estimating that trade-off.

  4. "Risk-taking doesn't provide good investment results. But risk-taking does provide good marketing results."

    Wow, you've got that EXACTLY backwards. BACKWARDS.

    Good, smart risk-taking is precisely what's needed to provide results.

    Meanwhile, thieves like Madoff can ply their trade BECAUSE their returns show "no risk". The whole ABS and CDO phenomenon was based on the perception that the bonds were AAA and "risk free." That's why they sold like hotcakes!!!!! Everyone wants the holy grail of "stock returns with bond volatility" and the entire FoF industry is based on showing low-beta and consistent although not very high returns. Institutions like Invesco and others market their "absolute return" products to pensions and high-nets on the basis of providing ONLY 6% above RF, with, of course, a maximum standard deviation of ... wait for it ... 6%.

    NOBODY wants risk. Which is why you've got it exactly backwards. The "lack of risk" - or perception thereof - is GREAT MARKETING. "Risk" is the antithesis of marketing.

  5. as more and more trading and portfolio mgmt is done via IT/interface, one will not necessarily know the gender of any counterparty, so we shud see greater female activity in finance - trading rooms only make sense because proximity/immediacy is what other forms cannot provide.....but we are seeing tech erode the advantage of trading rooms too (all those bloomberg chat boxes are a harbinger of what the WoW generation is gonna bring to the mkts/economy)

  6. Does Blogger provide any sort of comment scoring thingy? I would like to flag the 20100822 0307 comment as "+5 idiot".

  7. Traders are taught that the Holy Grail to Investing doesn't exist. Real people were taught that all the planet's move about the earth, don't go to far out into the ocean(you'll fall off the earth), on and on..........

    When one looks outside the box(inventor), goes against the group(thinks for self), said they found(developed) something that is supposed to be impossible(airplanes), they were once killed. Now these people are called bad names and delegated to be unheard, and ignored group.

    The ultimate business solution. The ability to cut the cost of any business expense, or just plain invest.

    I developed multiple arbitrages that enable me to trade(not invest) in the finacial markets, without risk(The Holy Grail to Investing), or arbitrage that anyone can do. Over 30% a year.

    Thomas Adair