To younger readers – especially those with a background in behavioral finance – it may seem strange that this was ever even controversial. To be sure, neither gender has a monopoly on cognitive biases that can be costly.[1] Still, overconfidence appears to be a particularly male streak, not just in modern humans.[2]
This has important implications for investment strategies and fund management. More than 20 years ago, a now classic study looking at a large sample of individual investors found that women outperformed men by about in 1.4% in annual risk-adjusted net returns, largely because men were trading too much, presumably reflecting overconfidence.[3] Subsequent research over time and across multiple countries paints a more nuanced picture. As with many behavioral traits, there is great variation within both sexes, reflecting learning as well as cultural environments.
Change takes time, as people, firms and other institutions seek to replicate past examples of success through pattern-matching.
How to bring about cultural change
For example, perceived incongruity between traditional female gender roles and an occupational role that has traditionally and “ideally” been masculine, such as well-known star investors, tended to lead to less favorable views of women in such roles.[4] How to change culture when it comes to gender is a tricky subject in many areas of life, not just within finance.[5]
“Even in the 2020s, women still have different life experiences and perspectives. For investing, that translates into different needs, investment horizons and habits,” argues Katharina Seiler, portfolio manager at DWS. “Including more female investors benefits our business. As importantly, it has beneficial ripple effects for the economy and financial markets overall.”
Reducing the potential for groupthink
Numerous studies have shown that diversity can lead to more robust decision-making processes, reducing the potential for groupthink and enhancing risk management, potentially boosting returns and lowering earnings risks.[6] Investors can play a key role in this, by encouraging female empowerment at every level.[7] In turn, we expect such progress to be helpful in overcoming unconscious biases against other groups too, in the financial industry and beyond.
The key is for all members of a group, deciding, for example, on investment strategy, to feel listened to and safe to express a dissenting view respectfully. This helps to successfully resolve, rather than suppress, conflicts. Diversity, properly handled and encouraged, also opens the way to new, creative solutions. In a nutshell, overcoming unconscious biases can further our common understanding of financial markets and make asset managers more successful.[8]
