When Nancy Havens-Hasty first started out on Wall Street in the early 1970s, she noticed a few key discrepancies between how men and women approached their work.
“There were guys who got so angry they’d bang their phones on their desk and break their fingers,” says Havens-Hasty, who went on to become the first female employee on Bear Stearns’ board of directors and now manages Havens International Enhanced Fund, the third-highest performing merger arbitrage fund over the past five years, according to the Hedge Fund Journal.
“I never understood why that was a better reaction that just bursting into tears," she adds.
As it turns out, it’s not. A growing body of research shows that men are more emotional than women in ways that can be detrimental to their success as investors — and women generally make better money managers, even in the highest-risk folds of the industry.
In 2001, researchers at the University of California, Davisanalyzed the stock investments of 35,000 households and found that men traded 45 percent more than women, racking up more transaction costs and netting returns that were 1.4 percent lower. The numbers were even more pronounced for single men and women: 67 percent more trading and 2.3 percent less in returns.
A study conducted by Hedge Fund Research between 2000 and 2009 showed that funds managed by women significantly outperformed those run by men, with 9 percent returns for women and 5.82 percent for men.
Most of the explanations for this gender discrepancy point in one direction: Testosterone.
Neuro-economist Paul Zak of Claremont Graduate University recently conducted a test in which he raised testosterone levels in men, and he noticed that they became more emotionally engaged in the tasks they were faced with — but not in a good way.
“They become more emotional and less analytical,” Zak says. This kind of spike leads to impulsive behavior; men are more likely to make investment decisions based off a hot tip, for instance.
“Hiring the captain of the crew team at Yale to be a trader just because you think he’s supercompetitive and has high testosterone might not actually be adaptive,” Zak says.
Risk aversion, on the other hand, allows an investor to keep a level head and take the time to do research — an approach most often attributed to women, but that’s also a hallmark of one very famous man.
“If you were to observe Warren Buffett working every day, all he’s doing is reading. He just consumes information,” says LouAnn Loftus, author of the book "Warren Buffet Invests Like a Girl: And Why You Should, Too."
She adds: “Buffett tends to take less risk. He thinks longer term, and he’s not influenced by peer pressure. He manages his emotions better.”
Testosterone can also create trust issues. In another study, Claremont's Zak conducted an investment game with a group of subjects in which each investor was assured that his or her money would triple. The investment advisors within the game were allowed to return as much or as little money to the investors as they chose — the study was anonymous, and the advisors’ identities wouldn’t be revealed.
The results? “Women return more money than men,” he says. “They’re more trustworthy.”
Beyond that, male investment advisors took it personally if an investor didn’t entrust them with very much money — it raised their testosterone and they reacted by withholding returns. Not so with women. “Women don’t get this hot emotional result,” Zak says. “They’re proportional reciprocators.”
Women’s emotional stability comes partly from oxytocin, a hormone which floods their brains in far larger quantities than men.
“It’s active mostly in emotional areas of the brain, but it’s active in a calming, not an activating way,” says Zak, who has been studying oxytocin for the past decade.
The hormone could account for the fact that in thick of the financial crisis of 2008 and 2009, women investors fared far better than their male counterparts. According to a 2009 Vanguard study, men were more likely to sell when markets were at their lowest, while women stayed the course.
Yet women are still way underrepresented in professional investing: only three to six percent of all hedge fundsare run by women, for instance, according to industry estimates. And the long held belief that women's aversion to risk can be a detriment to personal investingis reinforced by some research. A 2010 study in the Journal of Financial Counseling and Planning concluded the following: "Women with low risk tolerance may be less likely to save, and when they do save, are less likely to choose assets that have greater growth overtime, leaving them financially underprepared for retiremenet."
But according to Lauren Templeton, who co-founded the hedge fund Maximum Pessimism with her great uncle, Sir John Templeton, there are times when risk aversion is, well, to be avoided altogether. In the current economy, for instance, we could use a few good men.
“Right now, coming out of the financial crisis, everyone is way too risk averse and we have a tendency to overestimate the downside,” says Templeton, who also serves as chair of the Galtere Institute at Chattanooga, Tenn., which teaches finance from a female perspective. “I would argue that the benefits would accrue to the investor who’s willing to take more risk.”
For the long run, moderate risk — the type found in the highest-risk-taking women — is ideal according to yet another study Claremont's Zak did on the genotypes of the most successful Wall Street traders.
The riskiest investors are likely to implode, and the super risk-averse don’t pull in returns, but those somewhere in the middle had the best long-term results — a “Goldilocks result,” as Zak puts it. “Our results suggest women might make better professional Wall Street traders than men.”