Finance claims to be a pragmatic science where portfolios and investment processes are based on a thorough analysis of the market.

Despite this contention, there appears to be a big difference between the returns derived by women and those achieved by men. According to a study done by Brad Barber and Terrance Odean from the University of California at Davis*, average women earn about one per cent more per year on their portfolios investments than men.

Overconfidence is greatest culprit for lower returns in men's portfolios. Selecting asset classes or common stocks that will outperform the market is always a difficult task. Predictability is low; feedback is noisy. Thus, stock or asset selection is the type of task where people are most overconfident. In that regard, psychologists have found that in areas such as finance, men are more overconfident than women.

Women and men look at investing differently

Men are inclined to feel more competent in financial matters than women do and, by the same token, tend to be more overconfident about their ability to make financial decisions than women.

When feedback is unequivocal and immediately available, women do not assess their ability as less than that of men. However, when such feedback is absent and ambiguous, women seem to have a lower opinion of their abilities and often underestimate themselves relative to men. But for men, due to their tendency to take too much credit for their successes, they become overconfident.

The result is that men tend to overestimate the precision of their knowledge, trade too much and hold riskier portfolios. Women tend to hold less risky portfolios than men, trade less but realize higher returns.

Control risk as well as emotions

The translation is: overconfidence could hurt your return. Predicting the financial markets is a highly difficult task. The majority of portfolio managers in North America are unable to beat the stock market indexes over a long period. In such an environment, investors should control their risk as well as their emotions.

After a series of good monthly returns for the stock market, overconfident investors could once again try to beat the market, take too much risk for the potential return and diverge from their target portfolios. Most of them will be boys. Others will maintain their asset allocation to achieve their long-term goals and will probably succeed. Most of them will be girls.

* BARBER, Brad M., and Terrance ODEAN. Boys Will Be Boys: Gender, Overconfidence and Common Stock Investment, Quarterly Journal of Economics, February 2001.