A recent study by Dove, “You are more beautiful than you think,” drew attention to women’s tendency to underestimate their beauty, leading to a vivid discussion online about women’s self-confidence and a parody about men’s greater tendency to make bloated assessments about themselves.
Gender differences in confidence don’t, however, just show up in regards to appearance. Behavioral finance studies show that women tend to be much less confident than men when it comes to investing, while men are often overconfident, and these different tendencies can have a real impact on portfolio positioning and performance.
In this post, the second of my series on ways women and men investors behave differently, I drill down into the research behind the gender-related confidence difference and what people can do to mitigate its potential negative financial impact. Here are my responses to three questions you may have about what I’m calling “the gender confidence gap.”
Q: What evidence is there that gender differences in confidence exist?
To measure confidence, researchers have used people’s tendency to under- or overestimate the precision of their information. In other words, researchers believe that the more sure we feel about our probabilistic assessments relative to true objective probabilities, the more overconfident we are. For example, if you are 90% sure that you are better than average at picking stocks, yet others are able to beat your performance half the time, you are overconfident in your self-assessment. (You can evaluate your own degree of under- or overconfidence using tests like this one.)
Researchers have found that gender differences in overconfidence tend to show up in tasks considered to be more masculine, and in fields such as mathematics. What’s more, they’ve found that men’s good performance is often attributed to skill, whereas women’s is often attributed to luck, and that over time, this kind of attribution may make men overconfident about their abilities.
Elsewhere, in finance, women tend to admit ignorance more openly than men, describing themselves as inexperienced. The recent BlackRock Investor Pulse survey of 4,000 Americans found that only about 48% of women describe themselves as knowledgeable about saving and investing vs. 57% of men, and that women generally feel less comfortable making investment decisions and investing in the stock market.
Q: How do confidence levels influence investing behavior and potentially hurt, and benefit, portfolio performance?
Women’s lack of confidence can lead to inertia when making investment decisions, aggravating women’s tendency to underinvest in risky assets and putting them at risk of falling short of longer-term financial goals. At the same time, however, the absence of a bloated view of one’s own investing skills and information can help one implement and stick to more disciplined buy-and-hold investment strategies, higher portfolio diversification, less excessive trading and promptly cutting loss-making positions.
For example, as women tend to be less confident and more cautious investors than men, they typically do more research, and take more time, before implementing an investment strategy. And at times of stress, they are likely to exercise more self-control and discipline than men and stick to their chosen strategies. For instance, the Vanguard Group Inc. found in a study on individual investors that during the financial crisis of 2008-2009 women were less likely than men to sell out of equities.
Meanwhile, overconfidence in one’s own investing abilities may lead to overly concentrated portfolios with only a few holdings, and to excessive trading. Possibly thanks to their lower confidence levels, women tend to trade less than men, outperforming men net of fees. A 1991 to 1997 study of a large US discount brokerage spanning more than 35,000 households showed that men traded stocks 45% more than women and, given that trading is costly, underperformed women by almost one percentage point a year. The difference was even more pronounced for single men and single women, presumably because married couples exert influence over each other’s trading decisions.
Finally, there is some evidence to suggest that perhaps thanks to their lower confidence, women may be more open than men to admitting that their initial actions were wrong. This, in turn, may lead them to more promptly cut loss-making positions and take advantage of capital losses for tax purposes, while letting winning investments continue to run.
Q: How can women and men potentially overcome the detrimental impact of distorted confidence levels?
While lack of confidence may induce inaction, the absence of an overly rosy perception of one’s own investing skills can also help one steer clear of common investment pitfalls, like those mentioned above. Key for women investors is realizing that they are often too modest about their own investing abilities, and increasing their knowledge and involvement in household financial decisions.
Meanwhile, key for male investors is seeking to reduce any portfolio overconcentration and excessive trading, and focusing on longer-term investment goals. Men may also want to take after women and be a bit more receptive to financial advice and research, whether from advisors or by outsourcing tactical market positioning to investment professionals with extensive resources.
Nelli Oster, PhD, is a Director and Investment Strategist in BlackRock’s Multi-Asset Strategies Group. She holds a BSc (Hons) in Management Sciences from the London School of Economics and a PhD in Finance from the Stanford Graduate School of Business, where her dissertation focused on behavioral finance.
Sources: Studies linked to throughout the post.