Who run the world? Money Honeys do!
Why would an investor care about a money manager’s gender? Does it matter that your broker sports Louboutins or loafers? Because capital — how to keep it and how to grow it — is the subject of a heated discussion about boys versus girls. And solid research shows it pays big to bet on babes.
A fascinating body of research demonstrates that women invest way differently than dudes. At least that’s the premise of Women of The Street: Why Female Money Managers Generate Higher Returns, a bangin’ book that argues women have an “inherent biological, cognitive and cerebral” edge over bros.
Empirically exploring issues of overconfidence, excessive trading, human endocrinology (i.e. hormones, testosterone and estrogen levels), and adaptive agents, the book builds on various threads and theories of behavioral finance, neuroeconomics and the psychology of risk-taking. It also draws on solid industry statistics that will shock and surprise you. The conclusion: chicks outperform their male peers — often by a long shot and especially during episodes of extreme market stress and elevated volatility.
“Women produce both cognitive and behavioral “alpha” in their investment approach, which contributes to outsized returns over the long-run,” says Meredith Jones, the book’s author and a bonafide financial femme fatale.
Through robust statistical sampling, the book surveys and studies the doyennes of Wall Street — girl gurus and risk managers who run hedge funds, private equity shops, venture capital portfolios, and prop desks — and evaluates their means and methods of generating ‘alpha’ (that’s hedge fund lingo for ‘returns over a benchmark’, say, the HFRX or the Eurekahedge 50, etc.).
Half of all Americans have money in the stock market or other tradable securities (topping $25 trillion), yet the ratio of women to men managers is seriously skewed. For example, there are only about 150 female-operated hedge funds in all, and for every lot of 80 male managers there is only one girl boss. Note: Wall Street is 96% male, according to the study’s data set, and the alternative manager universe is even more warped when it comes to women allocators.
The fact is that financial booms, bubbles, crashes, and panics are intrinsic features of markets, and males play a big role in accelerating and amplifying risk dynamics. Why? Guys are hyper-aggressive and hormonally volatile (they have too much testosterone and cortisol, the argument goes, making them prone to “externalizing aggression, taking on inordinate amounts of risk and seeking quick-fire thrills”). Moreover, the male’s amygdala (the part of the brain that governs ‘fear, flight and fight’ responses) triggers the HPA (hypothalmic-pituitary-adrenal) axis and hijacks the rational brain, commonly causing overreaction and poor ‘probability matching.’
The male nucleus accumbens (the brain’s ‘reptilian reward center’) inherently looks for range of the moment returns and snappy gratification. This makes dudes miscalculate expected returns and trade more than they have to (thus incurring insane transaction costs). According to the data, male traders — especially single ones — make 67% more trades than girls (all things equal) and have a terrible tendency to sell into market drawdowns, thereby eroding returns and amplifying losses — and allowing girls to pocket almost 300 basis points over them. During moments of extreme market dislocations like during the subprime crisis, gals demonstrated a tendency to not participate in panic selling, avoiding ‘herding’ and other groupthink foibles.
Girls basically outperform by way of being cool as a cucumber and internalizing stress. Women have a flatter and more favorable probability weighting curve, for instance, and are superior at matching expected outcomes with actual ones (read about girls and heuristics here). Crucially, women are way less ‘over-confident’ than chaps, rarely throwing in all their chips at once and showing a tendency to diversify and re-balance their holdings more rationally and dispassionately.
So wise up, gents! Read Women of The Street: Why Female Money Managers Generate Higher Returns!
Images via WikiMedia Commons + Billions + Equity
VIVISXN MEDIA – Finance + Investing