Paul Nixon | Head | Behavioural Finance | Momentum Investments | mail me | 

The renowned behavioural finance research duo, Barber and Odean, published a paper in 2001 entitled Boys will be boys that ruffled a few feathers.

The duo studied and reported on the performance difference males versus females generated on their investments. Not only did they find a statistically significant difference in favour of women, but they also found that men had better investment performance in the mere presence of women. However, single men underperformed significantly more.

It doesn’t stop there. Forbes reported in 2023 that female hedge fund managers have the edge over their male counterparts. The reasons for both of the above findings were in principle attributed to overconfidence and excessive trading in portfolios, i.e. making more decisions and as a result, underperforming.

Behaviour tax

We have been studying investment behaviour in various contexts since the onset of the COVID-19 pandemic and we have established a metric that tracks the value eroded from investment decisions. We call it a “behaviour tax”.

We’ve also established machine learning techniques that study behavioural patterns and how these patterns impact the behaviour tax of the investor population. We decided to put these claims to the test in South Africa using these metrics (and some others).

When examining investors in unit trusts from 2020 until the end of 2023, the following interesting results emerged:

• The switch itch

The average number of switches (disinvesting from one unit trust and investing in another) by males is two per year. Females switch 5% less than their male counterparts.

• Overconfidence

The trend of chasing past performance when markets show signs of recovery is still very prominent. Here the overconfidence of males is equally prominent. We measure the overall extent to which males and females up-risk and de-risk their portfolios by tracking their asset allocation over time. This is the mix of stocks, property, bonds and cash (both local and offshore) that they hold in their portfolios. When males hit the accelerator during market performance, they hit it much harder. Their portfolios contain more risky asset classes during these periods (stocks and property) than their female counterparts. This is confirmed by a larger portion of males in the “Assertive” investor archetype that consistently up-risks their portfolio.

• The behaviour tax

Since the onset of the pandemic, the behaviour tax has plagued South African investors. This means that when performing a switch from one unit trust to another, investors in general are destroying value. Since COVID-19, males have experienced an average behaviour tax of a staggering 4% per year. Females, however, experienced a behaviour tax that was 20% lower than males.

The fairer sex has definitely won this round

Finally, we put this question to bed by examining which group experienced better investment returns. We included the entire population, both switchers and non-switchers (people who stayed invested).

The net result is that females tend to outperform their male counterparts by nearly 30 basis points or 0.3%, which is a similar result to global studies on this topic.

The answer as to whether females are better investors appears to be a resounding ‘yes’. It should be noted, however, that markets have provided a distinct return pattern in the past number of years that likely didn’t reward overconfidence. The debate will likely continue, but the fairer sex has definitely won this round.

Related FAQs: Women investors and behavioural finance

Q: Why do women investors tend to outperform their male counterparts in terms of investment returns?

A: Research in behavioural finance indicates that women investors are generally more disciplined and risk-averse, leading to better long-term investment outcomes. They are less likely to make impulsive financial decisions, which can be advantageous during times of market volatility.

Q: How did the COVID-19 pandemic affect the financial decision-making of women?

A: The COVID-19 pandemic established new patterns in financial planning among women. Many women investors have shown resilience and adaptability in their investment strategies, often leading to more successful outcomes during uncertain times.

Q: What role does behavioural finance play in understanding the investing habits of women?

A: Behavioural finance provides insights into the emotional and psychological factors that influence financial decisions. This lens helps explain why women, on average, tend to be more cautious and methodical in their investment approach compared to their male counterparts.

Q: How do women who invest differ in their portfolio choices compared to men?

A: Women investors often favour a more diversified portfolio and tend to hold onto their investments longer than men – this strategy helps them outperform in the long run.

Q: What evidence supports the claim that women investors outperform men?

A: Studies have shown that women investors typically achieve returns that are 30 basis points or 0.3% higher than men over time. This trend is partly attributed to their lower turnover rates and a more disciplined approach to investing.

Q: How can women maximise their investment potential according to insights from behavioural finance?

A: Women can maximise their investment potential by focusing on long-term goals, remaining disciplined during market fluctuations and avoiding emotional trading decisions. Leveraging the insights from behavioural finance can enhance their overall financial performance.

Q: What challenges do women investors face in the current investment landscape?

A: Women investors may face challenges such as gender biases in finance, lower confidence in their investing abilities and a lack of representation in financial advisory roles. Addressing these challenges is crucial for empowering women to take charge of their financial futures.