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Thursday 5 July 2012

A Woman’s Place is in the Money

Money Maketh Woman

The research showing that women are better investors than men has been around for a while.  This is linked to the evidence that women are more risk averse than men – they tend to take less chances in general and with their money in particular.

This leads to a simple idea; that we should encourage more women to get involved in trading, both in the professional world and in the home.  The reasoning is that if women are more cautious, and therefore more successful, investors then their stabilizing influence will lead to a safer and less volatile financial world.  Which is a nice idea, but is probably wrong, although you’ll need balls to admit it.

Sisters of Ambiguity

Probably the best known research showing the impact on trading of heightened female risk aversion is Brad Barber and Terrance Odean’s Boys Will Be Boys which shows men trading 45% more than women and losing nearly a percentage point of gains as a reward for their hairy-chest, beetle-browed old-time macho foolishness.  Odean and Barber posit that the cause of this difference is that age-old behavioral chestnut, overconfidence: we think they’re more capable of predicting the future than we actually are (see: Sexism and the City).

The gender specific research on overconfidence tends to indicate that women are less overconfident than men on tasks where feedback is ambiguous – precisely the situation pertaining in financial markets, where today’s defeat is tomorrow’s victory and next month’s Enron.  In these situations men remain as bullishly optimistic about their ability to foresee the unforeseeable as ever, while women prefer to reserve their opinions.  The idea that the intelligent trader withdraws from situations where the outcome is particularly uncertain is something we’ve seen before, as in the case where the better professional traders sit on their hands during periods of extreme volatility: they seem better calibrated to understand that there are times when trading is more than usually correlated with gambling (see: Craving a High: Trading on Dopamine).

Stereotypical Balls

Of course, trading rooms and fund manager roles tend to be heavily populated by men.  There’s lot of research and psychological theorising about why this might be.  For instance, Alice Eagly and Steven Karau have proposed a role congruity model which argues that society’s stereotyping of gender roles means that some jobs are incongruent with social expectations: so women aren’t expected to be business leaders and are evaluated more harshly than male equivalents when they achieve such roles. 

Whatever the reason, the idea that men are dominant in financial behavior, both on the trading floor and in the home, seems to be an established fact, as does the general finding that women are less active traders and generally reap greater rewards than men by being so.  Hence the argument that we should actively seek to involve women more in such transactions.

Now personally I’m entirely in favour of such an idea, living in a household in which the only other male is a dog and having between us possession of but a single set of testicles.  Nonetheless, the argument is suspect, because it’s making an assumption about the role of nature in the financial behavior of women.  In fact the idea that women are naturally less inclined to take risks seems to be bound up with stereotypes about their nurturing role in childrearing, homebuilding and sundry other female type role behaviors.

Not Lost, Not Ever

Indeed, the evidence that male and female risk behaviors are as much to do with nurture as nature is quite powerful.  Research we’ve discussed before has shown that mothers treat babies very differently dependent on whether they think they’re boys or girls.  “Boys” are bounced around and encouraged to take risks, “girls” are treated gently and warned off “risky” behaviors: in fact the “boys” and “girls” were dressed at random.  When asked whether they treated boys and girls differently the mothers insisted that they didn’t and were astonished when presented with the video evidence that they don’t know how they behave (see: Investors, Embrace Your Feminine Side).

Even the much vaunted male ability to get lost and wander around for hours while refusing to admit they’re lost or ask directions is possibly related to similar issues of upbringing.  Up until they’re about eight both boys and girls seem to have the same freedom to navigate around their neighbourhoods, but as they grow older parents become less protective over boys, whose range of geographical movement becomes much greater than that of their sisters.  However:
"The interesting thing is that these differences don't appear to be inherent; boys, in other words, aren't born better at geographic tasks than girls are.  When researchers studied the subset of girls who traveled most freely and widely in their local areas, they found that these girls use about the same amount of detail in their maps as boys do."
See: Errornomics: Why We Make Mistakes and What We Can Do to Avoid Them

Educating Risk

Some researchers wondered if this difference in upbringing might account for the lesser willingness of women to take risks with their finances, and their reduced overconfidence.  Casting about for a way of testing this hypothesis Alison Booth and Patrick Nolan came up with the novel approach of looking at the difference between girls brought up in single sex schools compared to those educated in co-educational establishments with all those horrid, smelly and distracting boys.  In Gender Differences in Risk Behavior: Does Nuture Matter? they successfully disproved Betteridge’s Law of Headlines:
“Gender differences in preferences for risk-taking are sensitive to the gender mix of the experimental group, with girls being more likely to choose risky outcomes when assigned to all-girl groups. This suggests that observed gender differences in behaviour under uncertainty found in previous studies might reflect social learning rather than inherent gender traits”
Or, in more straightforward terms: women are taught to be risk averse by experience, they’re not born that way.  This research adds to the previously limited set of evidence that this might be the case: a single study carried out on the Khasi in India, a particularly matrilineal society, where women are ultra-competitive, and the equal rights movement is led by and on behalf of men, not women.

The evidence, such as it is, provides food for thought for everyone.  Employing women as risk moderators in stereotypical male environments or even getting them to take more responsibility for the family finances might actually have the desired effect of removing volatility from the system, but this isn’t a simple panacea.  Most likely the women willing to tolerate these roles will be the ones that are particularly pro-risk in the first place.  

And, personally I don’t want to be the one to tell my partner that she needs to fill in a risk assessment form before she can start trading on behalf of the family.

Nuture’s Choice

Of course, if female risk preferences are determined by upbringing then parents have some choice in how they socialize their daughters – and their sons for that matter.  This probably comes down to a difficult balance between giving them the best shot at independence and ensuring that they can roughly conform to societal expectations: I want my daughters to be independent, not social misfits.

As usual when nature and nuture get deployed in any argument the result is inconclusive, but the positive thing to take from the debate is that risk preferences are not innate.  Which is as good a thing for men as it is for women.  What nuture can do nuture can undo: still, if you're male and crap at investing at least you can blame your parents. 

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  1. The thing to take from the debate is the benefit of moderation, with an emphasis on the safe side.

    Excessive risk propensity and excessive risk aversion are both costly, but the downside risks count double the upside benefits.

    A lot of so-called risk taking is really risk shifting. Risk taking is fine, but NOT with MY nest-egg, MY family, MY job, MY taxes, not even MY back yard.

  2. And then Ina Drew came along and blew up 10 years worth of research ;)

  3. And then Ina Drew came along and blew up 10 years worth of research ;)

    The exception that proofs the rule? ;)