If you read the work of pop economists these days, everything and everyone is rational — even if the outcomes make no sense. Take men and women. How have we, collectively as humans, managed to evolve into the dominant global species?
The economist’s answer is rational division of labor: Some of our distant ancestors sent the whole tribe out on the hunt, men, women and even children. Ancient humans, meanwhile, figured out that some should hunt and some should gather. Diversity of food sources helped us thrive.
With few exceptions, men did the hunting. Physical strength was a factor in bringing down a wild animal. So was testosterone for aggressiveness. Tangling with a beast was risky work with a big payoff, if it worked out. If not, you got gored.
Fast forward a few millennia and you see this same stone-age drama playing out in the financial markets. As The Washington Post noted recently, the academics have long known that when women invest, they tend to beat men solidly — by 2.3% on an individual investor basis and by 4.6% when women work together.
Can a man learn to trade like a woman? Take this simple quiz. There’s no prize for getting them all right, but if you learn something it might just save your retirement.
1. You get up in the morning. Before coffee, before greeting your family, you check your portfolio on your smartphone. Immediately, you notice two positions that have moved significantly in after-hours trading. You begin to think about how best to take action. You fire up your computer and pour a cup of joe.
A. You are probably a man.
B. No, just as likely a woman.
C. Could be either, this is common-sense investing.
The answer is A, probably a man. Terry Odean at the University of California found that men traded 45% more than did women. Excessive trading is part of the reason men made less money over time, he found.
2. A major technology company has announced a new device will be launched in the coming six months. Your brother-in-law is in the business and has tipped you off that the device will change the world. You did a bit of programming at one time and “speak geek” fluently. The stock seems undervalued so far this year.
A. Buy that stock on a dip, any dip.
B. Whoa! Buy a single stock? Let’s not be rash.
C. Wait for the news to drive it up and go short.
The answer is B. Women tended to win by not picking stocks at all and instead by owning diversified investment funds. You might chalk that up to lack of understanding, but another way to look at it is realism: Women grasp that a little knowledge can be an incredibly dangerous thing, so they stand back. They might lose out on a hot tip now and again, but more often they are protected from retirement-wrecking mistakes.
3. Your portfolio is up 27% year-to-date. You react to this news by…
A. Calling up your buddies to crow about it.
B. Doing a little moonwalking across the ninth green.
C. Backchecking your portfolio for errors and selling off the funds with the highest gains.
Yup, the correct answer is C. It’s great to outperform the markets, but research shows that men like to keep score while women prefer to cash in gains as they happen. While most investors recognize the advantage of selling gainers (and buying stocks out of favor), they rarely follow through. They suffer from the mistaken notion that selling a winner is giving up on it, rather than realizing the cash value of the win by steadily rebalancing.
4. Your portfolio is down 27% year-to-date. You react to this news by…
A. Reviewing your holdings and making tough sell decisions.
B. Looking over your picks and coming up with reasons each position soon will rebound.
C. Drinking heavily.
If you chose A, you are much more likely to have a winning record over the long term. Women are less prone to “confirmation bias,” that is, seeking evidence of the correctness of their past decisions. A rational retirement investor instead bails out of losers in a timely fashion.
5. You have three computer screens in your home office, two live market video feeds, a pager with stock headlines running and subscriptions to nine newsletters. You are a virtual trading desk unto yourself, at least in terms of incoming data and opinions. Your best friend wants to chat about investments.
A. You clam up. What your friend really wants is your deep knowledge of what’s next.
B. You chat about your current thinking at length over coffee, testing your ideas.
C. Your friend is kind of an idiot, so you listen just to be on the opposite side of those trades.
The best answer is B. Men generally avoid second opinions like the plague, for fear of being contradicted. Women work together on investing and outperform men when they do so, according to the research.
None of the above is to suggest, even mildly, that men cannot invest well (many do) or that missing a Y chromosome means you should start a hedge fund. But it does mean that retirement investing is done best methodically and less emotionally, and that’s a lesson we all need to learn.