Gender Differences in Investing:
Shifting the Financial Services Industry

Brad Barber, Gallagher Professor of Finance at the UC Davis GSM, is an authority on investor psychology, and has done extensive research on gender-related overconfidence in stock trading. In this blog, he discusses gender differences in investing and provides recommendations to the financial advisory industry to adjust their services to appeal to the growing number of female investors.

Why are men more willing to take risks when it comes to investing? Empirical observations conclude that men have a greater appetite for risk. Studies on investor behavior indicate that men are more tolerant of risk than women. For example, studies indicate men allocate a greater proportion of their investment portfolio to stocks rather than bonds. What-is-more, the stocks men choose tend to be riskier (more volatile with greater market risk). All of this suggests that men are more comfortable taking on higher risk. We do not yet understand whether these differences in risk appetite between the genders can be traced to nature or nurture. Are women innately more cautious than men or do environmental factors govern these differences. This question remains an area of ongoing research, and, though the jury is still out, I suspect both nature and nurture are important factors.

In terms of investment, higher risk means higher returns. However, it also means there is a higher risk of negative outcomes, so it’s not a free lunch. Men’s willingness to take more risks also means a higher risk of shortfalls.

Investment results for men and women

Men tend to be more overconfident than women, and overconfident investors tend to think they know more than they actually do. As a result, overconfident investors trade too much to their potential detriment.

In a study published in 2000, “Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment,” we found that men’s investment portfolios suffer from their overconfident behavior in the market. Men trade 45 percent more than women, and trading reduces men’s net returns by 2.65 percentage points a year as opposed to 1.72 percentage points for women. Women trade less frequently and hold less volatile portfolios. Thus, women beat men by an average of about one percentage point annually on a risk-adjusted basis. The message here is not that women are good investors but rather, both men and women are hurt by excessive trading and fail to match market rates of return; men merely trade more and, as a result, suffer more.

Shifting the financial advisory industry

Last week, I read an article in Investing News: “Women & investing: Why many advisers are missing out”. The article cited that Women now control $18.4 trillion in consumer spending, hold approximately 30% of global wealth and are the sole heads of 32% of U.S. households. However, even though women are now the largest emerging market in the world, several studies conclude that women are unhappy with the services and products offered by the financial advisory industry.

This is partially a legacy issue: the financial services industry is male dominated and likely ill-equipped to address the needs and perspectives of women. However, women investors are a growing market, one that’s ripe for advisors who are able to tailor their products to meet the unique challenges of advising women investors.

Women have different perspectives and values than men. Research indicates women tend to be more altruistic while men tend to be more competitive. It is reasonable to expect these and other value differences between the genders would translate into different attitudes toward retirement, financial planning, and managing financial assets. While the research on these issues is in its infancy, it stands to reason that female advisers are likely best able to understand and address the needs of female investors. Yet, the financial advice industry remains male dominated. Through continuing research and education, all financial advisers will have the opportunity to better understand how women approach investing.

While educating the advisors is crucial, it’s just as important to educate the investors. For instance, it could be that women eschew stock investments not because of the risk involved, but because they don’t feel they have access to the right information in order to make well-informed decisions. If this is indeed the case, thoughtful advice and education would encourage people to participate in the stock market intelligently. On-the-other-hand, if women prefer low allocations to stocks because of a well thought out preference for lower risk, then thoughtful advice and education is unlikely to change their portfolio choices. The key here would be to ensure that low risk profiles are chosen not by default, but by an informed rational choice.

A feet-on-the-ground perspective

Christine Cote, First Vice President of Investments at UBS Financial Services, provided  a feet-on-the ground perspective on what’s happening with women investors:

“Women come up against many unique challenges when it comes to investing. Firstly, investment lingo isn’t part of most women’s vernacular. Women don’t talk about money among themselves because traditionally it’s considered rather impolite. Men don’t have that barrier. They widely discuss ways to improve their quality of life, and they treat investing as a competitive sport. One of my female clients told me: ‘I don’t talk about it with other women because I don’t want them to feel bad.’ I relayed that to a male client of mine who laughed: ‘I talk about it with my friends because we want to make each other feel bad!’ It’s not meant to be super negative, but it’s a competitive drive that pushes men to keep up with the Joneses, so to speak. 

In general, I would say that men are more focused on wealth accumulation, and women are more focused on preservation. Women tend to be more attracted to planning, and they’re cash-flow driven. They have more of what I call the ‘bag lady syndrome’, where they empathize with the woman on the park bench—they’re wary of putting themselves in a position where they might lose control over their future.

This kind of psychology absolutely plays out in the dynamic between investor and advisor. Eighty five percent of advisers are men whose conversations oftentimes include a lot of jargon. Again, women are not typically comfortable with those terms because it’s not part of their daily vocabulary.

I have a great example from a presentation I attended, led by a female senior executive here at UBS. This incredibly successful woman admitted that sometimes when she meets with her advisor, she doesn’t understand some of the terms he uses, and she doesn’t say anything due to her fear of looking stupid—and this is a woman with a Ph.D. in rocket science! One of the things we need to push is training women investors to ask questions in order to feel comfortable making financial decisions.

Furthermore, male advisors (just like male investors) are more focused on growing assets. Sometimes the approach they take with women clients is too aggressive and forceful. It’s necessary to provide advisors with the tools to have a deeper consideration of who their client is and what their needs are, which will allow them to better tailor services toward women.”

This blog is part of our Faculty Spotlight Series, highlighting GSM faculty members and their areas of expertise. The topics featured in this series introduce potential themes for UC Davis Executive Education Customized Programs.


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