THE EDGE

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INDUSTRY RESEARCHER

THE EDGE 7

6

Maintaining conviction – Female

investors may be better at

differentiating market noise from bad

investments. Women tend to be less

likely to sell underperforming

investments simply because of broad

market declines.

I think most investors will agree that

behaviour impacts investment

performance. Billionaire Seth Klarman

once said that “Investing is the intersection

of economics and psychology,” and it seems

increasingly undeniable that that

statement is true. Whether it’s the

behaviour of the individual investor, the

investment advisor with whom they work,

the money managers to whom they

allocate or even the broad market, macroeconomic

behaviour (like the “January

effect” or market bubbles such as the tech

wreck).

Even the market turbulence in late August

can, in some ways, be blamed on behaviour.

While some would blame the sell-off on a

single source (China), others argue that the

accumulation of bad news caused underreaction

(as news started to trickle in in

July) followed by overreaction as the flood

of bad news (oil prices, China, etc.)

continued to come. You simply can’t

escape the fact that behaviour matters

when it comes to investing.

Let’s think of it this way: There are a

growing number of studies that show that

cortisol, the stress hormone, and

testosterone interact in interesting ways

when it comes to investing. One study that

I highlighted in my book looked at men and

women’s trading behaviour as cortisol

levels rose. They put the subjects’ hands in

ice water to simulate stress and increase

cortisol levels. The study showed that men,

as cortisol levels increased, had a tendency

to make riskier trades. Women did not

have a similar reaction. So during a

stressful event such as a market sell-off, an

all-male investment management team has

their hand in the same bucket of ice water.

They may increase their risk-taking,

creating correlated behaviour among

money managers. And we all know

correlation is not our friend during market

sell-offs.

So my question is this: If we diversify

portfolios by geography, liquidity, number

of investments, asset classes and other

factors, why don’t we also consider

diversification from a behavioural and

gender point of view?

Women of the Street: Why Female Money Managers Generate Higher

Returns

W

OMEN of The Street looks at behavioural and biological

investment research to explore how women think about investing,

and to determine why women may have a money management edge. The

book then identifies and interviews 11 top female “market wizards” in

hedge funds, private equity, venture capital, and other asset classes to

see how women’s innate investing characteristics translate in different

strategies and markets into significant profits. From less overconfidence,

overtrading, and testosterone to a greater tolerance for market noise

and more consistent application of investment strategy, there are a

number reasons why women approach investing in a unique way. Women

create both cognitive and behavioural "alpha" with their investment

style, which contributes over the long-run to outsized investment

returns.

by EDGEFOLIO Thursday, 1 October 2015

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