Women and investment: what strategies can be used to counter cognitive bias?
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Nadège Guimard Senior Investment Consultant
Social norms, the legacy of history, and even common language are all potential obstacles to women getting involved in traditionally male-dominated areas such as financial investment. Yet many recent studies prove that when women invest, they perform. So how do we get past the clichés when cognitive biases, some of which are typical of investors and are reinforced by gender, such as loss aversion and self-esteem add to the complexity? Here are some answers illustrative of five frequent biases.
Women and investment: an oxymoron?
Many recent publications illustrate this phenomenon. Not only are women increasingly involved in the management of their finances, but the total amount of wealth controlled by women worldwide is expected to exceed 90 billion dollars by 2023, which represents a third of the world's wealth, with growth rates rising steadily and overtaking those of their male counterparts. According to Boston Consulting Group 1 , women accumulate an additional 5 trillion dollars of global wealth annually. According to McKinsey2, European women's assets could grow at an average annual rate of 8.1%, compared with 2.7% for men, until 2030. On a cumulative basis, the share of investments by European women is expected to reach 45% of assets under management by 2030.
This trend and the associated potential in absolute terms have not escaped the attention of the finance industry. Since the pandemic, given an increased fragility in their financial situation combined with working hours which offer greater flexibility through the normalisation of remote working, such factors have accelerated the movement: indeed, since the pandemic 50% of women say they are interested in investing in the financial markets beyond their pension savings, and 42% say they want to invest more3. This phenomenon has been amplified by the success of trading platforms such as the well-known Robinhood, which have seen an average of six times more women registering than men, according to a study by the Financial Times 4.
So, if more and more women are interested in investing, could cognitive bias be the final hurdles?
Cognitive bias occurs when our brain unknowingly deceives us.
“Cognitive biases", or heuristics, are a topic of psychology used in marketing strategies and gaining much media attention, are also increasingly integrated and applied to behavioural finance, these biases are commonly defined as distortions in information processing that lead to errors of judgement. They are numerous, unconscious, and universal, often based on social norms and stereotypes that impact our reasoning. Daniel Kahneman, a Doctor of Psychology, won a Nobel Prize in 2002 for his research on this subject, not in medicine but economics. Indeed, his studies on these human biases have been applied to behavioural finance because, in addition to directly impacting our decision-making in general, they undoubtedly influence our investment decisions.
01. Neutralising the “essentialism” bias
The essentialism bias linked to gender implies that skills and social roles are restricted to the biological sex. In other words, wealth management is supposed to be a masculine domain. The term "estate" comes literally from the Latin "patrimonium," the inheritance from the father. Yet beyond this explicitly gendered etymology, management as a "good father figure" or the "standard housewife's shopping basket" are all common expressions that are stereotypical concerning women and may discourage them from getting involved in this field.
To counter these gender stereotypes reinforced by common language and expressions, we, therefore prefer to refer to wealth management and use neutral, contemporary terms and expressions such as "prudent" management and "consumer price index".
02. Correcting the “representativeness” bias
This heuristic is a bias similar to the image of the male doctor and the female nurse or the male banker, and his female assistant: the representativeness bias is that of a misleading association. As the UN points out (www.unwomen.org) 5, many fields suffer from this bias, including the Nobel Prizes, politics, cinema, sports, and Michelin stars. In finance, while progress is being made in increasing the number of women in the industry, not all banking professions are at the same level of diversity, particularly regarding investments. The media coverage of confident female Wall Street investors such as Cathie Wood, founder of Ark Investissement, known for her aggressive style in technology stocks and bitcoin, is beginning to change perceptions and is positively influencing the entire industry.
Talking woman to woman about investments through client advisers and investment specialists may be helpful. Taking into account the specific financial needs of women, adapting to their needs, and simply considering pension provisions differently for obvious demographic reasons are also ways of overcoming this bias of representativeness.
03. Venus versus Mars: the "affect heuristic" in contrast with the "rationality" bias.
These are two opposite, highly stereotyped but equally insidious, biases. The first is a heuristic perceived as "feminine" because it is defined as a tendency to make decisions influenced by emotions. In contrast, the rationality bias overestimates one's objectivity and ability to make logical decisions. Not only does recent neurological research prove that there are no fundamental differences between male and female brains, but beyond this hasty and misleading division, both biases distort judgment and lead to poor decision-making.
That's why, when it comes to investment, beyond gender it's essential to work as a team in a spirit of collegiality and diversity but with acceptance of contradictions. We must be methodically rigorous and factual and, if not counteract biases, factor them into our decision-making processes.
04. A more conservative approach, the “loss aversion” bias
This cognitive bias is based on the fact that we feel the pain of losing twice as strongly as the pleasure of winning. However, numerous academic studies 6 on risk and gender have shown that women are more averse to financial risk. As a result, they invest less or more conservatively, which is confirmed by risk profiles and empirical studies. When asked about their attitude towards investment risk, McKinsey 2 found that a higher proportion of women than men reported adopting a risk-averse approach to asset allocation, with a lower ratio exposed to equities than the average portfolios of men.
In fact, on a comparable risk-adjusted basis, diversity, or even parity, is a strategy that pays off in terms of asset management performance.6
05. "The investor's worst enemy (...) is probably himself." Benjamin Graham: the “overconfidence” bias.
The overconfidence bias reflects an overestimation of one's actual performance 7. Although if men may be more confident than women about their success in uncertain situations, academic studies also show that in a population of managers and professionals, the gender difference in financial risk-taking is blurred, particularly depending on the level of financial qualifications achieved.
This is why women rely more on professional advisers when making investment decisions; 64% of women use professional advisers, compared with only 46% of men. 8 However women are not being listened to properly. While the need and appetite for financial advice are growing amongst women this market remains financially underserved. A 2022 study by Ellevest found that nearly 70% of American women have never met a financial adviser, compared with just 41% of men 9.
Structuring, educating, and supporting are, in general terms the three pillars for advice in, but with women they may resonate even more. While the biases described above are universal and impossible to counter, they may however be integrated into the investment process. Being aware of them is an essential first step, but being methodically rigorous and factual, being inclusive, overcoming stereotypes and social norms, and inviting women to manage their assets are probably key to transcending such biases and providing better service.
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References :
1. BCG, Managing the Next Decade of Women’s Wealth, April 2020
2. McKinsey, as of June 23, 2022. https://www.mckinsey.com/industries/financial-services/our-insights/wake-up-and-see-the-women-wealth-managements-underserved-segment
3. Fidelity Investment 2021 Women and Investing Study
4. « Women outpace men in signing up to investment platforms », Financial Times, décembre 2020
5. The representation of women in society | ONU Femmes (unwomen.org)
7. “Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment”
8. J.P. Morgan, Women and Investing: Planning for the Future, April 2021
9. Ellevest, The State of Women’s Financial Wellness in 2022, as of August 2022
Author
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Nadège Guimard, who holds a degree in Business and Corporate Finance from Toulouse Business School, began her career at Newedge in Paris before moving to Luxembourg to work in investment fund structuring. She later worked at Candriam Asset Management before becoming head of discretionary management at Banque Internationale in Luxembourg, and then specializing in investment funds in Geneva at Julius Baer. With nearly a decade of experience in multi-asset investment consulting, she joined the Investment Consulting team at Piguet Galland & Cie, valuing client interaction and continuous learning.
