Barber, B. M., & Odean, T. (2001). Boys will be boys: Gender, overconfidence, and common stock investment. The Quarterly Journal of Economics, 116(1), 261-292.
Abstract:
- Published in 2001, this study by Terrance Odean and Brad Barber, both researchers at the University of California, highlighted the underperformance of male investors compared to their female counterparts.
- Based on a sample of 37,664 investors observed between 1991 and 1997, the authors demonstrate that men exhibit an average annual return of 1.72% compared to 2.65% for women.
- This performance gap can be explained in particular by an exacerbated « overconfidence » bias among male investors, leading them to place 45% more orders than women, thereby multiplying brokerage fees.
Several psychological studies have shown that men exhibit a more pronounced « overconfidence » bias than their female counterparts. Christine Lagarde, President of the European Central Bank, suggested as much in a famous statement on the 10th anniversary of the crisis: « If Lehman Brothers had been called ‘Lehman Sisters,’ the situation of banks in 2008 would have been very different. » In other words, men tend to overestimate their knowledge and believe they have more accurate information than others in a variety of areas. For example, « overconfidence » bias leads individuals to have overly optimistic beliefs about their professional abilities (Meyer et al., 2013) or their physical fitness (Obling et al., 2015). What are the implications for financial markets? In 2001, two researchers at the University of California, Terrance Odean and Brad Barber, published a pioneering study in the prestigious Quarterly Journal of Economics on the effects of male overconfidence bias on the performance of individual investors. In particular, they showed that male investors achieved an average annual return 0.94 percentage points lower than that of women. Another striking finding was that the performance gap between men and women was even wider among single investors. Single men placed nearly 67% more orders than single women, reducing their returns by an additional 1.44 percentage points per year.
1. Measuring « overconfidence » in financial markets
When it comes to investing, overconfidence bias logically leads individuals to overestimate their understanding of financial markets and ignore negative signals from the market. However, a rational investor is supposed to place an order only if the utility generated (i.e., the expected gain) from the order exceeds its transaction costs. Thus, overconfidence bias will lead an investor to increase their trading volume, as they will overestimate the expected return on their investments. In fact, they will reduce their portfolio’s return by taking on too much risk and incurring higher transaction costs (due to a greater number of transactions).
Based on the monthly returns of 37,664 US investors between February 1991 and January 1997, Terrance Odean and Brad Barber tested two hypotheses in their paper: (H1) men on average make more transactions than women; and (H2) men underperform women. The econometric method used in this study is a natural experiment, in other words, an experiment that does not take place in a laboratory, but in « real life. » Unlike traditional randomized experiments, natural experiments are not contextualized by researchers, but rather observed and analyzed ex post.
2. Are female investors more successful than their male counterparts?
Table II below presents the main results of the study we are about to describe. First, according to Panel A, women hold portfolios that are slightly smaller in value on average (USD 18,371 compared to USD 21,975 for men). However, women’s transaction volume amounts to approximately 53% (4.4% multiplied by 12 months) compared to 77% of the portfolio amount for men (6.41% multiplied by 12). This initial result confirms hypothesis H1, according to which women, who are less prone to « overconfidence » bias, have lower turnover than their male counterparts.
Panel B then shows us that women obtain gross monthly returns that are 0.041% lower than those of the portfolio they held at the beginning of the year, compared with a loss of 0.069% for men, i.e., a difference of 0.028% (0.34% per year). In other words, men and women were on average losers over the years studied (I imagine that’s right?), but men’s average portfolios performed even worse than women’s. The same observation applies when net returns are taken into account. These shortfalls are statistically significant with 99% confidence intervals (hence the three stars next to the coefficient value).
3. What about the influence of partners?
Married couples can influence each other’s investment decisions. In some cases, the spouse who makes investment decisions may be different from the one who initially opened a brokerage account. As such, the authors assume that the observable differences in the investment strategies of men and women will be greater for single men and single women, since they are not influenced by their spouses.
To study this possibility, the authors divided their sample into four groups: married women, married men, single women, and single men. The average value and turnover of the portfolios held by the four groups are presented in the last six columns of Table II (Panel A). In line with initial expectations, the differences in portfolio turnover are greater between single women and men than between married women and men. The same observation applies when looking at gross and net monthly returns: the benchmark gross monthly abnormal returns for single women (-0.029) and single men (-0.074) are statistically significant at the 1% level, as is the difference between them (O.045, or 0.54% per year).
Conclusion
Thus, a more pronounced « overconfidence » bias among men degrades the performance of their portfolios compared to female investors. In a telephone interview with the New York Times, Brad Barber also explained that overconfident investors—i.e., men—interpret financial news in the very short term and trade on this « noise, » which is sometimes insignificant. However, the author also states that he is unable to provide a clear explanation for the prominence of « overconfidence » among men: is it innate? Is it the result of the environment in which the individual grows up? Is it due to their level of education (Mishra and Metilda, 2015)? To date, the scientific community has struggled to reach a consensus on the answer.
References
Meyer, A. N., Payne, V. L., Meeks, D. W., Rao, R., & Singh, H. (2013). Physicians’ diagnostic accuracy, confidence, and resource requests: a vignette study. JAMA Internal Medicine, 173(21), 1952-1958.
Mishra, K. C., & Metilda, M. J. (2015). A study on the impact of investment experience, gender, and level of education on overconfidence and self-attribution bias. IIMB Management Review, 27(4), 228-239.
Obling, K. H., Hansen, A. L. S., Overgaard, K., Normann, K., Sandbaek, A., & Maindal, H. T. (2015). Association between self-reported and objectively measured physical fitness level in a middle-aged population in primary care. Preventive Medicine Reports, 2, 462-466.
