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Women Traders and Volatility

Saturday, February 28, 2015

-by Sheila & Rich Jamison -

Today, the pièce de résistance in our series on volatility … do men and women behave differently in the financial markets? (click here for part 1 and/or here for part 2)

New research suggests they do. Apparent differences prove to be real differences – not products of imagination.

Surprise

The source of volatility we’ve seen over the last year may not have been Greece, Ukraine, low oil prices or a weak European economy. It could be due to one of the sexes.

Which One?

Unfortunately from Rich’s perspective – and happily from Sheila’s – a study* published this month found that it’s men.

The researchers found simply this – more men in the trading mix led to higher volatility (bigger ‘bubbles’); more women led to less volatility (smaller ‘bubbles’).

Volatility and Bubbles

The study used fundamental value of a group of assets as its baseline. It then measured and compared the size of pricing changes when different percentages of men and women trading them. The study concluded that financial markets might operate differently if women operated them.

In male dominated trading, prices rose higher above fundamental values (creating bigger ‘bubbles’) than they did in female dominated trading. The size of the fall back to fundamental values is obviously bigger when prices rise higher above those values. When that drop gets big enough, the term “crash” is applied.

Does it Make a Difference?

What might these findings mean it they hold true in real world situations? In the authors words,

“It became a popular mantra in the wake of the collapse of the housing bubble in 2008 that men’s competitive nature and overconfidence were responsible for the crash. Indeed womenare relatively scarce in the fields of investment and corporate finance, representing only about 10 percent of Wall Street traders. Our data suggest that increasing the proportion ofwomen traders might have a dampening effect on the likelihood and magnitude of bubbles.”

In other words, more women in action in the financial markets might have lessened the severity of the 2007-2008 disaster. Perhaps the financial crisis might never have occurred at all.

Individuals or Groups

Substanting their findings of men versus women, investing committees showed similar results. The higher percentage of women on a committee, the lower the volatility.

This shouldn’t come as surprising. It has been shown in many fields that diverse views lead to better decisions. Multiple perspectives and different analytical approaches often produce better outcomes.

In our Experience

It is not unusual – rather it is generally the rule – that when Sheila and Rich discuss a market issue, their perspectives lead to different views on a topic. Bringing in opinions of others on the team can lead to additional perspectives.

The Key Element

Examining any issue from multiple perspectives helps to evaluate that issue more rigorously, more methodically and more effectively. Thorough analysis is key to better decisions.

It’s often said that males tend to be more trigger-happy, competitive and aggressive while women are more deliberate, cooperative, patient and cautious. If so, is it any wonder that increasing the percentage of women involved in trading or trading decisions lessens the size of bubbles?

These same qualities spill over into the realm of advice. By virtue of their natural inclinations, women tend to make investing easier to understand, frequently offering a better investor experience.

Ladies, let’s get trading!!

*The study was an experiment, run under controlled (laboratory) conditions, but nonetheless still an experiment. It’s findings need to be confirmed in the real world. This will not be easy – perhaps impossible – as it would entail knowing how many women, how many men and how many committees (with their male/female makeup) are trading at any given time.


References:
3 traits the best investment cultures all share. History has proven that talent is not enough, and team chemistry is what differentiates investment firms. Michael Roberge. Investmentnews.com. November 13, 2014.
Thar SHE Blows? Gender, Competition, and Bubbles in Experimental Asset Markets. Catherine C. Eckel and Sascha C. Füllbrunn. American Economic Review 2015, 105(2): 906–920.

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