Pragma Synesi – interesting bits

Compendium of interesting bits I come across, with an occasional IMHO

Recession caused by too many Y chromosomes?

Chalk one up for women: “…men, and single men in particular, overestimate their financial knowledge, their ability to pick stocks, and the value of the information they have…”

From the Globe and Mail, May. 29, 2009:

In the company of men

What really leads markets to tank and economies into recession: corporate greed, unscrupulous lenders, poorly understood financial products? It may actually be a case of too many Y chromosomes

Ken Hunt

From Friday’s Globe and Mail Last updated on Friday, May. 29, 2009 02:16PM EDT

And that’s the news from Lake Wobegon, where all the women are strong, all the men are good-looking, and all the children are above average.” So ends each episode of Garrison Keillor’s A Prairie Home Companion, the radio program that has made the unyielding optimism of the residents in a fictional Minnesota hamlet so famous that a term has popped up in modern psychology to describe people’s tendency to overestimate their own talents and capabilities: the Lake Wobegon effect.

The classic example of research in this field dates back to 1981, when Swedish psychologist Ola Svenson found that the vast majority of individuals believe themselves to be above-average drivers. In fact, 80% of the people Svenson studied thought they were in the top 30% of all drivers, based on skill. A similar proportion believed that their income prospects and life expectancy were also much better than most. Confidence is a virtue, of course—it is only when people vastly overestimate their ability that it causes problems for everyone else. As an example of this, try driving around in Stockholm. Or Montreal.

Or worse: Fork over your life savings to that macho breed of professional traders and money managers, all of whom know in their hearts that they can beat the market.

In 2001, finance professors Brad Barber and Terrance Odean were given unprecedented access to the trading records of more than 35,000 households at a large discount brokerage. What they found was that men, and single men in particular, overestimate their financial knowledge, their ability to pick stocks, and the value of the information they have. The consequence—details of which were published in a paper titled “Boys Will Be Boys: Gender, Overconfidence and Common Stock Investment” in The Quarterly Journal of Economics—was that men consistently overtraded their portfolios. Married men did better than the single ones, but neither group outperformed the women, who were both more cautious and more successful. In other words, the more female influence there was over trading decisions, the better the portfolios performed.

Since then, studies have consistently found that women make better value investors than men: Women tend to take a more balanced approach, while men are more likely to chase after the latest market fad or hot sector of the moment. Is it possible that men just aren’t genetically cut out to be prudent investors? Has Darwinian programming—which has traditionally favoured aggression and risk-taking—undermined the ability of males to make rational decisions when it comes to playing the market? Moreover, should we be surprised that the unrepentant boys’ clubs from Wall Street to Canary Wharf got the world so deeply in hock? At some point, it became impossible not to notice that all of the CEOs who have been begging for bailouts from governments around the world are men. The old saying used to be that if women were in charge of the world, there would be no more wars. Perhaps the new mantra should be that if women were in charge of the world, there would be no more financial disasters.

A recently distributed discussion paper by Daniela Beckmann and Lukas Menkhoff, two German economists, is titled “Will Women Be Women? Analyzing the Gender Difference Among Financial Experts.” This paper updates Barber and Odean’s work by analyzing the differences between male and female fund managers in the United States, Italy, Germany and Thailand. What they found is that even at the top tiers of the financial world, men and women still tend to behave as we might expect: Women are more risk averse, show fewer signs of overconfidence and are less willing to participate in direct competition with one another. But perhaps what Beckmann and Menkhoff didn’t find is more telling. There was no evidence to suggest that female fund managers’ tendency to avoid risk had harmed the overall performance of their funds in any way.

Yet women remain dramatically under-represented in the world of fund management. According to the market analysis firm Morningstar Research, in 1998 women managed about 8% of the 200 largest mutual funds. By 2008, the number had climbed to 12%—an improvement, yes, but only just.

Susan Byrne is one woman who wasn’t going to wait for the financial world to make room for her. Twenty-five years ago, she founded her own firm, Westwood Holdings Group, and is widely regarded as one of the best value investors around, male or female.

“At Westwood our top people are about half men and half women,” she points out. “You certainly don’t need to be a woman to have sound financial judgment, but the culture of the place you work is very important. I tend to be very conservative and very disciplined, so I think those values persist as they would in any institution where the founder is still present.”

Byrne regularly talks to young women to try to get more of them to consider a career in high finance. “A lot of women self-select out of the profession,” she says. “In part, I think that’s because it is seen as a job that involves a lot of math, which is still seen as something women don’t want to do. Most young women, it seems, are drawn to the relationship side of the business world, where there are more opportunities for client interaction, and perhaps a better work/life balance. Because of societal pressures, I think women tend to be better team players, whereas men are more pushed towards individual achievement. If we do things right, we can balance those drives.”

Whatever balance Byrne has achieved, she must be doing something right. In the first four months of 2009, Westwood Holdings Group shares rose 40%.

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July 8, 2009 - Posted by | behaviour, economics, psychology | , , ,

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