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Why He Jumps In And She Tests The Water
When Investing, Men and Women Respond to Risk Differently

By Michael S. Rosenwald
Sunday, August 17, 2008

At home, my wife takes care of the utility bills, the checkbook, the grocery store coupons, the mortgage, and occasionally me. I take care of the investments. A few months ago, against her judgment, I moved some money out of a relatively safe, nicely performing mutual fund and into one that was more aggressive.

The other night I asked why she let me do such a thing, and she said, "I don't like dealing with that stuff."

A few minutes later, she added: "You'd better not screw it up."

Our household, it turns out, is like many others. Studies by numerous university economists and behavioral finance experts show that men and women, after all these years of growing closer together in the workplace, on athletic fields and in classrooms, are still somewhat far apart when it comes to roles in investing and to attitudes about where and how to sock away money.

A survey of American households performed by Iowa State University and presented to the NASD Investor Education Foundation found that in relationships in which couples didn't make investment decisions together, the men overwhelmingly took control. Women reported finding investing more stressful, less exciting and more difficult than men did. "The men are just much more comfortable than the women," said Tahira Hira, a consumer economics professor at Iowa State and author of the study.

Emily Chiang, an investment adviser at Alexander Randolph in Reston, thinks men still tend to dominate the investing world -- on Wall Street, among certified personal financial advisers (only 23 percent of whom are women) and in homes across America -- because of evolutionary psychology dating to the hunter-gatherer days. "Men are hunters," she said. "Women are more like gatherers."

What is fascinating about some of the research into how men and women approach investing is that when women do take more active roles, their behavior is far different from men's. These studies show that one of the most significant differences between men and women is their approaches to risk and how much they are willing to tolerate. Men tolerate more risk than women, which means that over time, women's returns could be less.

"Women sometimes take overly conservative positions, and sometimes then they don't make as much money as men," Chiang said. "It's true that most men are willing to take more risks than women."

In one illuminating report, Colorado State University researchers examined a large sample of household investment holdings and found that single women held 43 percent of their wealth in risky assets while single men held 51 percent. As their wealth increased, women devoted less money to risky assets than men did.

There are also studies that have shown that women prefer to invest in large-cap, slower-growth companies and that men prefer riskier, small-cap firms with big upsides. "The battle between greed and fear is involved in all investing," said Tracey Baker, a vice president at CJM Wealth Advisers in Fairfax. "There is a little more greed in the guys and a little more fear in the girls."

But perhaps because of that, there is a flip side: Women largely exhibit more self-control and rational behavior than men do when it comes to investment decisions.

"Men are more willing to make decisions without studying them," said Hira, the Iowa State professor. "They also feel like they can beat up the market. On the other hand, when women get involved, they are more diligent workers. They study. They talk. They learn. They don't have the urge to beat the market."

Merrill Lynch Investment Managers, now part of BlackRock, studied these differences, surveying 1,000 investors. The findings were striking, especially when it came to a phenomenon in behavioral finance known as loss aversion -- the idea that losing money hurts more than getting money feels good. Loss aversion is one explanation for why investors often hold on to losing investments longer than they should. Selling losers forces us to admit that we are, well, losers.

The survey showed that 47 percent of men held on to a loser too long vs. 35 percent of women. Perhaps not surprising: Forty-eight percent of men said they had done this more than once vs. 34 percent of women. Conversely, 43 percent of men vs. 28 percent of women reported waiting too long to sell a winning investment, perhaps squandering some profit.

Men were also more likely than women, according to the study, to allocate too much money to one particular stock, buy a hot stock without doing any research, attempt to beat the market and ignore the tax consequences of their trades.

Men also reported that they traded stocks far more often than they should, which is a considerable problem. Research by Terrance Odean, a prominent behavioral economist at the University of California at Berkeley, has shown that too much trading is harmful to the portfolios of average retail investors using online trading services.

When people have a choice of two stocks to sell, they more often sell the stock that does better in the future and hold on to one that does worse, Odean found. And they tend to then buy stocks that do worse than the stock they just sold. In a study called "Boys Will Be Boys," Odean found that single men trade 67 percent more than single women, earning 2.3 percent less in returns.

"It's the overtrading that causes men to have lower returns," Odean said. "On average, both men and women tend to make trades that they would be better off not making, but men just make more of them."

Where a lot of these studies fall short is looking at what happens when men and women actively trade together, as a single unit, bringing both their tendencies to the table. Few researchers have looked at this, but earlier this year, Brooke Harrington, a sociologist at the Max Planck Institute for the Study of Societies, published a fascinating book called "Pop Finance" that looked at the behavior of investment clubs.

She found no evidence that single-sex clubs did better than the opposite sex. But she did find what she calls a "diversity premium" -- men and women earn 2 percent more together than alone.

They each bring their own biases and decision-making approaches to trades, and their portfolios are more balanced. A remarkable example: the bias for and against investing in consumer products companies. The all-male groups that Harrington examined had 4 percent of their assets in such companies. The all-female groups had 35 percent. But when investing together, there was more balance -- 26 percent of assets were in consumer products.

The results show that "if you are a male investing alone, you should adopt a female perspective, too," said Gary Charness, an economist at the University of California at Santa Barbara. "If you are a female investing alone, you should adopt a male perspective. If you put the two groups together, you get balance."

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