Much has been said about the experience of women in banking, but for all the targets and goals and deadlines in the world, there’s not a lot of literature suggesting that the pursuit of parity across finance might, in fact, be misguided.
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A recent research paper from Rosy Cilia and Florian Meier of Heriot Watt University, however, suggested something else. Cilia & Meier found that, even among trained and active trading professionals, male professionals in trading roles were much more prone to overconfidence in their abilities than female ones.
Although this was not a new finding, it was the first specifically researching financial services professionals, rather than retail investors. The researchers noted that masculinity and overconfidence had a well-established relationship.
A healthy risk appetite is strongly associated with higher returns when trading – Goldman Sachs, which has a higher risk appetite than Citi, posted more >$100m profit trading days (81 in total versus Citi’s 72), despite having access to less total capital to finance trading activity.
There was also a well -established relationship between women and having a herd mentality. The desire for loss aversion was gender neutral. Interestingly, however, the herding tendency of women was tied to experience. Cilia & Meier found that, as a woman gained more experience in her role, she would be less subject to this herding instinct.
The male tendency to overconfidence isn’t just about placing big bets. It’s been known for more 25 years that “male investors tend to overestimate their financial literacy,” which led to “heightened levels of trading”, and, in turn, “reduced returns.”
“One potential explanation for these differences has been attributed to psychological and cognitive differences across genders, such as a difference in risk perceptions,” one research paper in 2014 by Hassan et al..
The researchers noted that the “persistence of biases” in the industry meant that employers ought to take steps to “mitigate” the interference of these tendencies with portfolio management. “Firms should adjust their risk management strategies, focusing on the composition of diverse decision-making teams, to mitigate the influence of cognitive biases.”
Presumably, the implication is that hedge fund and trading roles (which traditionally have larger risk appetites) ought to have a higher proportion of men, while asset management roles (with smaller risk appetites) ought to be more female.
The research has spoken.
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