More Data Explaining Why #Women Are Better #Traders Than Men

Why women are better traders and investors than men — a psychological explanation

Warwick University Business School (“WUBS”) have conducted a fascinating study on the investment performance of men and women.  They show that women perform significantly better with a good sample size and temporal range.  They make some interesting remarks on why this might be.  I think I can add some extra psychological depth to this — so we can see that female traders appear to have some quite deep natural advantages and they should feel encouraged about managing their own investments.

What WUBS did was collaborate with the share dealing service offered by Barclays Bank.  They looked at 2800 investors over three years.  There are various ways of measuring stock market performance, but one of the most common is to compare the performance of a portfolio with a relevant stock market index.  (I explain what a stock market index is here: What Is A #Bear #Market?)

It is quite hard to outperform an index consistently.  This fact is what lies behind the recent strong growth of tracker funds.  You may as well buy the index if you can’t beat it.  The results from the WUBS study showed that women consistently outperformed the FTSE-100 index and men did not.  The male investors returned 0.14% above the index which is basically statistically consistent with having performed equivalently to it.  However, I suspect that these investors would have been better off just buying the index rather than paying a lot of trading fees to obtain the same performance.

The female investors outperformed the FTSE-100 by a massive 1.80%.  This may not sound much, but it is actually huge.  Done over a lengthy period, it would lead to significantly improved results.  Let us assume that the FTSE-100 returns 5% a year.  If you started with £10,000 and performed as the male investors do, you would end up with £45,000 after 30 years.  (It is always important to think long term in the stock market; to prefigure part of the answers I will discuss below, the women seem to understand this.)  The female investors would turn £10,000 into £72,000 over the same 30 year period.  That is a huge improvement over £45,000 and bear in mind that the female investors have taken the same risk, making it even more impressive.  (One caveat is in order here: no one performs this consistently over the long-term–if they say they do, it is a huge red flag.  Remember Madoff?  But the point stands.)

How are female investors outperforming?

WUBS and Barclays set out a few reasons which could explain the outperformance.  One of them is the one we already know about.  Women are less over-confident than men.  I explain how that works here: Women Are Better Traders Than Men.  In summary, women tend less often to think that their new idea is brilliant and then abandon their previous idea before it has had time to work.  Men on the other hand just get extremely convinced about their new sure-fire idea and go with it.  Interestingly, women’s lack of over-confidence is not manifested in what they say about their beliefs.  They just don’t act on them as often.  We could discuss philosophically what that means about our account of belief — but the key point is that women are less likely to trade in deleterious ways!

But there are new reasons suggested.  There are three that I think are especially interesting.

  • Women stay away from terrible ideas like #Bitcoin (this explanation is proposed by a Guardian commentary from Patrick Collinson; see links below)
  • Women avoid “lottery style” trading
    • It has always struck me as insanity to own a lot of penny stocks which are supposed to return ten times the amount you invest in a year because this almost never happens.  As I discuss in my book, The Psychology of Successful Trading, traders can get seduced by vivid stories, incorrectly over-estimating massively their likelihood of coming about.  A far better approach is just to sit still in major stocks for a long time, with maybe some spicy options for fun in a minor section of the portfolio.  The problem with picking the next Amazon (or Bitcoin, for that matter) is that you can’t.  You would have to own a million penny stocks for each Amazon or Apple.  So this strategy is exciting but completely unsuccessful.
  • Men hold on to their losers
    • It seems that women are better at getting out of something which hasn’t worked.  This came very close to home for me.  Infamously, I am still holding Deutsche Bank stock, partly because I recommended it in my book as a contrarian trade.  Banks are supposed to trade at at least book value (in fact, 2.0x before the crisis).  So if you buy a bank at 0.25x book value, you can’t lose right?  Because it is buying something for a quarter of its value.  That hasn’t worked for me yet — maybe a female trader would have got out of this position a long time ago.

In conclusion, we have seen some deep-seated psychological advantages which female traders will have over male ones.  This should encourage women in their investing.

Links:

WUBS: https://www.wbs.ac.uk/news/are-women-better-investors-than-men/

Guardian: https://www.theguardian.com/money/2018/nov/24/the-truth-about-investing-women-do-it-better-than-men

I would like to thank Dr M R Hampson for suggesting I look at this.

 

In Financial Markets, Relying on the “Wisdom of Crowds” Can Be Very Risky

We all tend to do what everyone else does. This saves time and effort on many occasions, but it can cost you a lot of money in financial markets

We all tend to do what everyone else does, even when we can see that everyone else is wrong.  In financial markets, this can lead to bubbles and herd behaviour.  It is important to be aware of this tendency within our psychology, so you can at appropriate times avoid joining in the bubbles.  It is important to do this because you will lose a lot of money if you participate or, once in, fail to exit before everyone else does.

In this post, I will briefly outline the relevant psychology so you can both look for the effects in your own thinking and expect those same effects in other market participants.  This will improve your trading.  I discuss this bias and many others in a financial markets context in my new book (see link below).

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Photo by Pixabay on Pexels.com

Conformity Bias is also known in the literature as the Asch Effect, after the pioneer experimenter.  Asch obtained really surprising results, which will show you how strong this effect is.  He had a naive member of the public sit in a room in front of a blackboard with four other people.  The member of the public thought that the other four people were also naive members of the public, but in reality they were actors who were going to behave in a specific way suggested by Asch.

A line of a certain length was drawn on the left side blackboard.  Some other reference lines of different lengths were drawn on the right hand side.  One of them was clearly the same length as the reference line and all of the rest were clearly much shorter or much longer.  Asch then had the people say which of the test lines on the right was the same length as the reference line.

If the naive member of the public went last and heard all of the actors give a wrong answer, he tended to go along with them even though the answer was obviously and clearly wrong.  Amazingly, Asch found that most people gave an obviously wrong answer some of the time and also that some people gave wrong answers most of the time.

This is how strong Conformity Bias is: it works even when the answer is obvious.  Imagine how much more dangerous it is in financial markets where the answers are much less clear cut and much ambiguous and conflicting data must be weighed.

three round silver and gold colored coins
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I think this is one factor behind a lot of famous bubbles in financial history. Right now, it looks to me as though the cryptocurrencies, most notably Bitcoin, are exhibiting bubble characteristics.  One sign of this is the enthusiasm of a particular football manager, one noted for his lack of financial acumen, for Ethereum.  I do not say this is a scam; I merely suggest that one should look to more fundamental underpinnings for value than “everyone likes it and it has gone up a lot.”

Avoid Conformity Bias and trade better by trading the other way when you see it happening.

See Also:

What Is “Theory Of Mind?”

The Illusory Truth Effect And Financial Markets

If You Like Gin And Marmite, You Are Probably A Better Trader

The Late Evaluation Effect And Financial Markets

How To Profit From Thorium

Current excitement in the Gulf of Mexico demonstrates one of the reasons why we need new angles in energy. That didn’t stop me buying BP shares at the weekend – after a price decline from 647p to 517p I put in a limit order with an upper limit of 500p, just to see if it would get that low. I got filled, which I thought was great until the top kill/junk shot tanked later on. So right now we are off 13% to 430p. My response to that was to buy some more – call me psycho. Anyway, in a year either I will have been wiped out or made out like a bandit, and those are the only two options I am interested in. Life choices are the same as trade choices. In case you were wondering.

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But anyway, to the point. Nuclear power is better than carbon-based energy generation. It’s greener – and you can’t defeat that argument by pointing to the waste problem – because we already have that problem. So we may as well have it in spades, right? In any case, the Finns are going to sort it out by sticking it deep underground in a sort of fairly stable rock chamber. And isn’t it about time the Finns contributed something? Where have they been lately? There’s been lots going on and we never hear from them. Finland buries its nuclear past. But does that look like good press? Is there a different answer?

Yes – there’s even a better option: thorium. For three major reasons.

Less waste

Thorium-based reactors produce waste products which have a half life much shorter than the 100s of thousands of years involved with uranium reactors.

It’s available

The uranium is going to run out. And quicker than you think if you note that we have maybe 60 years worth. That is at current rates of use but you might want to assume greater energy use in the future and a higher nuclear component.

It’s not weaponisable

You can’t make nuclear weapons from thorium. So if one state, say the US, wanted to persuade another state, say Iran, to act consistently with the latter’s stated intentions only in the realm of power generation, it could offer them thorium based reactor technology and then be intensely relaxed about the consequences. Because there wouldn’t be any.

So who believes this story and does anyone care?

HATCH, REID INTRODUCE NEW THORIUM NUCLEAR FUEL BILL TO PROMOTE ENERGY INDEPENDENCE

This is a Bill in the US Senate which notes that the energy dependence of the US is a national security issue for that country. There’s another Bill in committee which observes that the US nuclear submarine fleet would be grounded (I know that’s wrong – but what happens to non-flying vessels when they can’t go anywhere…?) without uranium fuel. And mandates the Secretary of the Navy to look at thorium as a replacement.

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Congressman Sestak’s Amendments in National Defense Authorization Act Pass House

So this is a US national security issue and a convincing picture in general. But the former element means one thing: lots and lots of money. Where’s the thorium? Virginia, for example. Not so much dealing with difficult people for essential products.

So what should you do if you believe the story? These are the two stocks to buy. Firstly you want exposure to the design story. And secondly you want some thorium. There’s the usual triple lock on investment decisions: compelling story, pure exposure, acceptable risk. The first box I already ticked. Secondly you can buy two stocks as listed below. The first one is a consultancy specialising in thorium reactor design. The second one is basically a very speculative outfit with at least three men and a dog in Canada. They have a licence to dig in a hill next to one where some people before found some thorium. [Actually it’s better than that – today they announced the hiring of a new experienced exec and they gave him “incentive stock options for 150,000 shares exercisable over 5 years at $0.14 each, subject to vesting provisions”. So this guy believes they are going north of there.]

Lightbridge Corporation

RockBridge Resources Inc

It will be apparent that option two is slightly more risky. Option one isn’t safe because nothing is, but it is NASDAQ listed so you have some better transparency and reporting. Though you should never forget that Enron was main board listed. Rockbridge are listed on the Vancouver startup board but you can get the exposure through a pink sheet OTC trade in NY. This is a pass-through derivative. So the recommended division should be something like 90/10. Which was what I was going for when I did this trade on behalf of myself and Mark L – except I got confused by the factor of two and ended up with 80/20. When you try to hold 20 numbers in your head at the same time, you always forget one, or mix up GBPUSD with USDGBP or something. But again, trades are like life and serendipity can be the new name for chaos.

See Also:

What Is “Theory Of Mind?”

The Psychology of Successful Trading: see clip below of me explaining my new book!

The Illusory Truth Effect And Financial Markets

The Late Evaluation Effect And Financial Markets