Psychologists have found that men are more prone to overconfidence than women -- how else do you explain the guy who won’t stop to ask for directions? Evolutionary psychologists have speculated that this tendency toward overconfidence arose in our hunter-gatherer ancestors because confidence improves your survival chances when face-to-face with a wild animal. However, today, we face the market, rather than wild animals. Unlike the hunt, when it comes to investing, men’s overconfidence can doom them to financial failure.
Here are five major money mistakes that can cause men to slip up when it comes to investing:
Actively trading stocks
If you are looking at websites for minute-by-minute updates of commodity prices or the latest stock chart, then you have a problem. Research has shown that as much as you read about stocks, you will be no better at choosing them than someone who has instead spent his or her time doing needlepoint work. You’re convinced your research and instincts will help you pinpoint what the market is going to do next, so you engage in frequent trading. In doing so, you incur all of the transaction costs associated with trading (commissions, taxes, bid-ask spreads, etc.) but don’t actually pick stocks any better than the woman in the next office.
Concentrating on “hot” funds
Women seem to have a better ability to pick good funds because they concentrate on the fees a fund charges rather than what fund happens to be hot at any given moment. Unlike reading financial publications, scrutinizing the fees that are charged by the financial products you own and the taxes they generate is a very good use of your time. Mutual funds are a particularly important area because some funds that seem very similar may have very different tax implications. Even within a given class of funds, such as stocks, the taxable distribution can vary widely.
Sitting on a stock too long
Even though trading stocks is frequently an indicator of overconfidence, so is holding on to it for too long. If you find yourself continuing to sit on a stock that has lost value over the course of several years, this is also a sign that overconfidence has gotten the best of you. When you bought the stock, you thought it was going to increase in value, and now the market has proven you wrong. The problem is that you are both hesitant to internalize some data that your confidence might be misplaced. If you sell the stock at a loss, you will have to admit to yourself that you were wrong. In doing so, you chip away at your own image -- and it’s painful.
Checking asset values frequently
Men tend to find the pain of losing a certain amount of money more potent than the joy they derive from receiving the same amount. The values of stocks and bonds increase and decrease on a regular basis, and even if they do tend to go up over time, the pain associated with seeing a daily loss is real. When you become overly anxious about your portfolio, you’re more likely to trade assets, and this active trading generally leads to decreases rather than increases in wealth, as mentioned previously. You will experience more peace of mind if you forego the morning ritual of checking your financial websites, and you are also likely to be richer for it.
Not listening to good financial advice
Men have a hard time listening to the thoughts and advice of others and changing their own views in light of those thoughts. This is true whether you think you know where you are going, and can’t bear the thought that someone at the gas station will tell you that you were wrong, or whether you are facing a decision about how to plan for your financial well-being in retirement. Women are more likely to listen to and act on financial advice than men. If a company has a retirement planning seminar for its employees, the women will think they need the seminar more than men will, and they also will be more likely to use the information obtained in the seminar to make better financial decisions.
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