Tue, August 25, 2009
Does Testosterone Explain Investment Behavior in Men and Women?
A number of behavioral finance studies have shown that men tend to take greater levels of investment risk than women. Researchers at the University of Chicago and Northwestern University have added to these observations with new evidence that high testosterone levels are associated with risky investment behavior.
Although financial and economic models assume that people’s economic decisions are rational, the data suggest otherwise: real people can make silly decisions. Behavioral finance came into being in response to the observation that people’s financial decisions are often not strictly rational.
One of my favorite behavioral finance papers, by Brad Barber and Terrance Odean, is titled “Boys will be Boys: Gender, Overconfidence, and Common Stock Investment”. The 2001 paper analyzes the behavior of male and female stock investors and concludes that men tend to buy and sell much more frequently than women – an indication of overconfidence, since other studies have shown that frequent trading is usually not a successful strategy for amateurs. The Barber-Odean study is one of several that conclude that men are more risk-seeking than women when it comes to investments, but I think their study has the cleverest title.
Faceed with lots of data indicating gender differences in investment behavior, other researchers have been looking for a cause. Hormonal differences are an obvious candidate. The Chicago-Northwestern study isn’t the first to examine whether testosterone might play a role; a paper published last year correlated testosterone levels in males aged 18 to 23 with risk-taking behavior in an investment game.
What makes the recent study especially interesting is that it involved a group of people who already understood a lot about financial risks (MBA students) and it included both men and women. The research found that in the women studied, higher testosterone levels were indeed correlated with greater levels of investment risk-seeking. Curiously – and contrary to the earlier study – there was no such correlation for the males . Moreover, the research found that for male and female participants with low testosterone levels, there was little gender difference in risk-seeking behavior.
The study hardly proves that there is a causal relationship between high levels of testosterone and excessive investment risk-taking, of course; correlation doesn’t imply causality. There could be some other factor involved that hasn’t yet been identified. Still, the research will doubtless be useful: the next time a hedge fund collapses because it took on too much leverage, its manager can just explain to his investors that his testosterone levels were really high.
