Overconfidence; a guest (male!) chimes in

Who make better investors, men or women?

Okay, before we go any farther, disclaimer: I am a man. And yes, that means I am not Steph Marton. However, I’m today’s guest blogger on this forum on one of the hottest fields in Cognitive Science today—decision-making.

We all know that men and women differ in a range of ways—from the number of sexual partners they desire to susceptibility to mental disorders. Recent research has brought to light another interesting difference—men are more overconfident investors.

Overconfidence arises from a variety of decision-making biases. Its consequence is trade-happy investors. In recent studies by Brad Barber and Terrance Odean described by the New York Times, men are far more likely to trade early and often, incurring more fees, and, in bear markets, more losses. The studies explain that men are more confident in their investing skills—confidence, it turns out, that is misguided.

Studies have shown that people—both men and women—tend to overestimate their own skills in just about everything, from driving to leadership. Several classic surveys showed that just about everybody thinks they are above average. In many circumstances, this belief is harmless. In the financial sector, however, overestimating your own abilities can hurt your bank account. And it turns out that men are far more likely, on average, to make these mistakes than women.

Male overconfidence, of course, is not restricted to playing the market. Other studies have shown that men simply are more confident in their own abilities. In this fascinating article from 2008, Newsweek covers the findings of researchers who found that men routinely overestimate their IQ, while women actually underestimate it.

Is male overconfidence learned or innate? Is it nature or nurture? Economist Alexandra Bernasek at Colorado State University conjectures it’s built in, hypothesizing that “aggressive risk-taking” fueled by overconfidence might have been an advantage in finding a mate through the ages. On the other hand, our culture tends to lend us the ideas that men are the intellectual superiors. One of the studies surveyed by Newsweek found people tend to rank their grandfathers smarter than their grandmothers and sons smarter than daughters.

The answer is probably some combination of both nature and nurture. Regardless of the cause, men are more confident in general, and specifically more overconfident in investing. Women, because they don’t overestimate their abilities, are smarter investors. But this more realistic view has its downsides. Confidence in one’s own abilities can make you an attractive job candidate and make people want to follow you. Being positive, even mistakenly, can be taken as an asset instead of a liability. So while women seem to make smarter decisions than men in investing, they are not necessarily rewarded.
In any case, I am confident this has been a damn good blog post.

Tune in soon for more from Steph Marton!