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Thursday, 17 May 2012

Become A Safer Investor – Get Married

Married CEOs and fund managers take less risks than single ones
Sex and CEOs

Sexual selection – the competition for mates – lies at the heart of Charles Darwin’s theory of natural selection. All things being equal – which they never are, of course – any behavior or attribute which makes an individual more attractive to breeding partners should end up being selected for because the unsuccessful individuals in the mating game leave no offspring.

Given the biological imperative to pass on their genes you’d expect people to fairly aggressive in trying to do so. The evidence suggests that humans, like other species, tend to become risk-takers when confronted with the need to acquire a partner, particularly one of higher status. All of which leads to the slightly odd conclusion that, if you want your money handled as safely as possible, you should look for married managers in stable relationships. Or women.

Risks and Rewards

The original idea behind natural selection was about competition for scarce resources. Food is the obvious resource – but accessing sources of food only keeps you alive, it doesn’t guarantee you’ll manage to pass on your genes. Hence Darwin added the concept of sexual selection, the idea of a competition, mainly amongst men, for access to mates. Sexual selection has been used to explain various animal kingdom oddities like the extravagance of the peacock’s tail and the ridiculous nests of the bower birds: the males are trying to impress prospective partners (see: Advertising on the Handicap Principle).

Michael Baker and Jon Maner in Risk-taking as a Situationally Sensitive Male Mating Strategy suggest that risk-taking is a valuable strategy for males attempting to signal their reproductive fitness:
"Among men, risky behaviors have potential for displaying to potential mates characteristics such as social dominance, confidence, ambition, skill and mental acuity, all of which are highly desired by women seeking a romantic partner ... Because male risk-taking is thought to be derived ultimately from intrasexual competition over potential mating opportunities, we predict that interest in procuring a mate will be associated with increased risk-taking among men".
Their evidence supports this prediction.  For those of us inclined to behavioral explanations of most things it's a neat twist that the experiment uses priming to induce the effect: male participants primed with pictures of attractive female faces were more likely to demonstrate risk taking behaviors, once memory effects were taken into account.  In essence, participants became more or less of a risk-taker dependent on whether they were exposed to pictures of attractive women.  Aren't we sad, guys?

More Cows, Please

This sort of experiment has led some researchers to wonder if this situational risk-taking behavior extends into investment markets which are, after all, the modern equivalent of the primeval jungle.  The idea is that although our underlying motivations are the same the particular expression of it will be in ways that are specific to local cultures. So if you live in a society where status is measured in the number of cattle you own then taking risks to acquire more cows is quite likely.

If, on the other hand, you’re a CEO or a fund manager you’re quite likely to judge status in terms of money: and to be prepared to take risks to get more of it. Which is OK, apart from the fact that CEOs and fund managers tend to be in the highly privileged position of being able to take risks with other peoples’ money in order to fuel their need for improved status. If they started trading other peoples' cows in order to get laid there'd likely be an uproar.

The corollary to this speculation is that corporate leaders who don’t have any pressing need to acquire a partner by demonstrating their money fuelled top-of-the-tree status will probably feel less inclined to take risks. All of which leads to the hypothesis that married senior executives will be less likely to be extreme risk takers than single ones.  Of course, marriage doesn’t always signal an end to the mating game for everyone but the researchers usefully suggest that the high costs of divorce might be an economic inducement for executives to remain nominally faithful.


The type of risk we’d expect in these situations is what’s known as idiosyncratic risk. Typically we see irrational risk taking behavior created by herding. An extreme example was the dotcom craze where everyone bought the same odd collection of telecom and IT stocks. In that case everyone was taking on risk, but as they were taking on similar risks this can be said to be systematic risk. In that situation idiosyncratic risk was doing something different from the herd – like buying old economy stocks.

Systematic risk isn’t any good to a mate-hunting red blooded corporate leader because it won’t help them stand out from the crowd and generate different returns. This is a competitive market and the alpha executive needs to make more money than everyone else; so they need to take on idiosyncratic risk.  This is the idea that Nikolai Roussanov and Pavel Savor have investigated in Status, Marriage and Managers’ Attitudes to Risk. The results are intriguing:
“We find that single CEOs, who are more likely to exhibit status concerns, are associated with firms that exhibit higher stock return volatility and pursue more aggressive investment policies. This effect is weaker for older CEOs. Similarly to corporate CEOs, single mutual fund managers exhibit greater idiosyncratic risk in their portfolio returns. Similarly to the CEOs, mutual fund managers who are single exhibit greater idiosyncratic risk exposure than their married peers.”
Married and Safe

Of course, as ever, correlation doesn’t prove causality, but it’s an interesting finding to say the least. Here we have a situation where competition in one market – for eligible partners – feeds across into the behavior of corporate leaders:
“Single CEOs invest more aggressively (in capital expenditures, R&D, advertising, and acquisitions) and their companies exhibit higher stock return volatility”
The research provides evidence that similar behaviors can be found amongst mutual fund managers. In particular mutual funds run by singletons tend to be less well diversified than those run by married individuals. Even more interestingly – and entirely in accordance with intuition – the same kind of skewed risk profiles appear to hold for individual investors. Single investors are much more likely to be less well diversified and have more invested in their average individual holding than married investors.

Evolution or Retirement

In fact there's plenty of research suggesting that more experienced investors are better diversified and hold less risky portfolios than inexperienced investors. So maybe this is because experienced investors are older and more likely to be married.  Or maybe they have children, mortgages and responsibilities.  In fact you can think of lots of reasons why risk-taking may be correlated with younger managers, but it all points to the idea that the situation of the controlling individual, be they CEO or fund manager, is relevant to their risk-taking profile.

Interestingly, of course, this research is gender specific, although the findings could read across in investment markets. Nonetheless it does hint at an explanation for why women, in general, seem more risk adverse than men.  Sadly if we're generally attracted to risk-takers then this would also explain why we're less inclined to put our capital in the hands of female fund managers.  More fool us, because if we can't separate our evolutionary history from our retirement needs then those mate-hungry managers will surely do it for us.

See also: Married Men and Money Management by Josh Brown @ The Reformed Broker.

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  1. I agree that older investors are more likely to be married and therefore they are also more experienced than younger investors who may well be less likely to be married.

  2. John Coates has a book, The Hour Between Dog and Wolf, describing the hormonal basis for risk taking, and the feedback loops between testosterone and cortisol. Basically he concludes the markets might be less volatile if there were older men and women. He'd need to test the hormonal effects on married/single men at different ages to see if there was a further correlation. As with all things, probably much more complicated that would be ideal!

    Loss aversion is also significant.

  3. What's the gender bias for entering the National Lottery?

    Or is the motivation for buying lottery tickets more subtle than gambling?