In the course of my work I come across a lot of research into the topics I care about: money, women and innovation. While many of the pieces are outstanding in terms of the diligence, few make me sit up for the sheer breadth and fresh insight they bring into a better understanding of an old problem.
I recently ran across a research piece that had precisely this effect. The title was truly yawn-inducing : “Gender differences in investment strategies: an information processing perspective”, causing me to almost toss it aside. Thankfully, I didn’t, and was rewarded with some incisive and truly fresh insights that can immediately be put into action (my ultimate litmus test for any research).
Men are from Mars, women are from Venus:
By now the backstory on women and investing is very familiar:
Women are more risk-averse, less confident in their own financial decisions, and generally suffer punitive consequences in their generally longer lifespans as a result. This effect is only worsened by the pay-gap (driven by whatever reason), as well as breaks in earning periods due to family and other commitments.
The other side of the story is also important: they are a vastly different segment for the financial advice industry to cater to (translating to higher short-term costs to serve), because of their focus on relationships, need for more information and education.
But all of this knowledge (with some hand-wringing thrown in), does little to explain why these differences exist and more importantly how they can effectively be addressed to benefit both the industry and the clients it serves.
This area is where the research paper shines. Here are its conclusions and recommendations in brief:
How the differences play out in investing
There are two main differences between the investing behavior and outcomes of men and women:
- Women are more risk-averse in their investment strategies
- Women investors have significantly lower confidence in their investment decisions
These differences have both good and bad consequences for women:
On the minus side:
- Women lose out on investment upside by missing out on risky but attractive investment opportunities, and also by investing in low-return options
- Their lower confidence leads to their avoidance of financial issues in general
- These negatives are compounded further as defined contribution retirement plans place a huge burden of investment strategies on the employees
But it’s not all doom and gloom. Their investment styles also have some advantages, although these are arguably drowned out by the negatives.
On the plus side:
- Since women do a lot of research and consider all aspects, they adopt a more holistic decision-making process leading to more informed and thoughtful investment decisions
- Risk aversion across multiple domains of decision making suggests that women tend to “shoot from the hip” less than men do, and therefore are at lower risk of acting impulsively on hot stock tips, and losing money as a result.
- Lastly, their higher risk aversion and possibly lower confidence lead to lower trading frequency, which has conclusively been shown to lead to better returns, all else equal.
The reality: men are from Heuristic, women are from Algorithmic?
This is the interesting hypothesis offered by the authors: the core differences in risk preference and investment confidence between men and women may boil down largely to one thing: what information they use to decide, and how they decide. In short,
Men and women select different types of information to process in their decision-making: Men tend to go for the salient information: the bottom-line, the one thing that matters, and disregard the nuances and dissonant details.
On the other hand, women tend to prefer comprehensive information processing: they are less likely to focus on one overarching feature (for example, the expected return), and absorb more dissonant information as well as more or all of the available information.
In other words, men exhibit a heuristic (or a rules / shortcuts based) decision-making process that focuses only on a few, critical factors to make their decision and ignores other contradictory or less-important details entirely. Women tend to prefer an information-heavy processing approach that takes a much larger volume of information to make their decision.
The authors cite several supporting studies to back this hypothesis, all of which lend credence to their claim. These studies show this process in play in fields as diverse as how men and women assimilate commercials, to how they absorb information in an accounting class. It’s fascinating reading if you’re interested.
One interesting by-product of this phenomenon is that as a result of these information preferences, men tend to be more efficient decision makers, whereas women tend to be more effective decision-makers. This is neither good nor bad. Actually it is both, because men tend to excel in making quick decisions in low-complexity matters which serves them well, but tend to use these same methods in areas that are more complex, which doesn’t serve them as well.
In contrast, while women do much better at complex decisions, they tend to get paralyzed in the less complex decisions because they continue to seek and process more information for a relatively less significant or important decision.
Who is a better decision maker? It all depends.
How this plays out in investing
This difference in how they select and process information explains a lot of the observed differences between men and women. For instance:
- When investing, unlike men, who tend to focus only on one metric such as the expected return, women look at more aspects, and perceive more of the risk in a given investment, making them more risk-averse.
- No investment is all good or all bad, and there may be conflicting pieces of data that work for or against selecting a specific investment. Women pick up on more of these contradictory pieces of data, and as a result, demonstrate lower confidence in their decisions, which is now seen as merely a manifestation of the fundamental uncertainty inherent in any investment decision. In simple English, they are not less confident, they are merely more realistic.
Why the industry should care and what it should do differently
All this would be merely good bedside reading if there weren’t real implications for how the industry does business. But if this hypothesis is true, there are significant pitfalls in the current service model, as well as meaningful upside waiting to be captured.
A segment is a group of potential customers who exhibit distinct needs and buying behaviors from other segments. If this is so, then women have different financial trajectories, different information processing paradigms, as well as different relationship preferences when compared to men. As a result, any offering targeting women must integrate all three dimensions to ensure it has a winning value proposition. Merely taking one aspect (for example different communication style), without addressing the other elements of the trifecta, is likely to fall flat.
The entire communications framework in the financial industry is designed around how men seek and consume information, highlighting salient information and de-emphasizing other important aspects of the investment opportunity or decision. For example, returns may be emphasized heavily. While all the required disclosures are provided, there is a huge difference between how the salient and the other information is presented today. In a world that addressed women’s information processing paradigm, there would be less distance between salient and other information.
This is perhaps one of the most intriguing points in the entire paper. The authors suggest that because of these differences, the financial industry should provide different kinds of decision support to male and female customers and prospects. Specifically:
- When dealing with male clients, advisors should highlight more of the risks to temper men’s tendency to overlook them, and to make overly aggressive investments.
- It also helps to prepare men in advance when a deliberately chosen strategy (e.g. conservative, to preserve principal), will negatively impact a salient metric that men may anchor to (e.g., return)
- When dealing with a female client, the opposite may be needed – encourage her to see the bigger picture, put the risks in their proper place, so that she takes an appropriate amount of risk to not outlive her money.
- Another source of value is to help women improve their decision-efficiency in low-complexity decisions or those with minimal differences in expected outcomes. Techniques based on behavioral science offer a lot of help here.
To conclude, it’s well-established that men and women are fundamentally different markets when it comes to investment and wealth products.
What is needed now is a well-informed, thoughtful and effective segmentation, product design, and service delivery approach that leverages the strengths of each segments, caters to their preferred styles, while also tempering the unique but very real risks presented by each.
Judy F. Graham, Edward J. Stendardi, Jr, Joan K. Myers, Mark J. Graham, (2002) “Gender differences in investment strategies: an information processing perspective”, International Journal of Bank Marketing, Vol. 20 Issue: 1, pp.17-26, https://doi.org/10.1108/02652320210415953