74). This dearth of information was likely caused by a reluctance to examine investment decisions on the part of investors themselves; nobody likes finding out that their "thought-out" considerations are not any more accurate than gut choices, and in fact, those gut choices likely had more influence than all of their mental work.
In the last decade, however, strides have been made in the study and analysis of investment behavior, revealing surprising details about what goes in to making stock trades. The first important work in the study of individual investment behavior was the realization that human beings do not always act rationally in regards to financial decisions, because according to the previously quoted Brad Barber and his co-author Terrance Odean, "the field of modern financial economics assumes that people behave with extreme rationality, but they do not" (Barber & Odean, 1999, p.41). Although "differences in investor literacy about financial markets" are responsible for some of these irrational decisions, there is ample evidence to suggest that psychology and personality are as important as financial literacy or education (Dhar & Zhu, 2006, p.726).
In a 2001 essay titled "What Makes Investors Trade?" Mark Grinblatt and Matti Keloharju examine some of the factors that influence investor's decisions to make certain trades. They argue that "the extraordinary degree of trading activity in financial markets represents one of the great challenges to the field of finance," because "many theoretical models in finance […] argue that there should be no trade at all," and furthermore, "empirical research […] also shows that the trades of many investors not only fail to cover transaction costs, but tend to lose money before transaction costs" (Grinblatt & Keloharju, 2001, p.589).
This latter scenario is precisely what happened when men sold their stock at all-time lows during the recent economic crisis, and Grinblatt and Keloharju revisited the topic in their 2009 essay "Sensation Seeking, Overconfidence, and Trading Activity." They found that after accounting "for a host of variables, including wealth, income, age, number of stocks owned, marital status, and occupation, […] overconfident investors and those investors most prone to sensation seeking trade more frequently" (Grinblatt & Keloharju, 2001, p.459). Although sex was not one of the variables considered in Grinblatt and Keloharju's analysis, those traits which contribute to more frequent trading are precisely those identified in men in both Sommer's overall article and the research conducted regarding the nucleus accumbens and the effect of certain images on financial risk-taking.
An additional study from 2009, "Who Gambles in the Stock Market?" "shows that the propensity to gamble and investment decisions are correlated," meaning that the very same traits which inspire gamblers to spend money on lotteries and other "investments" with a low chance of return affect those who spend money on the stock market, which suggests that the distinction between "investing" and "betting" is nearly nonexistent (Kumar, 2009, 1889). Thus, the same overconfidence that makes someone believe they will win a lottery might make them sure that whatever bit of news they heard that day will make them money on a stock trade, even though "short-term financial news often amounts to little more than meaningless 'noise'" (Sommer, 2010).
That these traits present themselves in different areas of finance should not be surprising; as Sommer points out in his article, "gender differences appear to extend to other financial behavior. For example, women who are C.E.O.'s and company directors tend to pay a lower premium in corporate takeovers, saving their shareholders a bundle, according to a 2008 study of mergers and acquisitions by Maurice D. Levi, Kai Li and Feng Zhang of the University of British Columbia."
The claims made by Jeff Sommer in his article "How Men's Overconfidence Hurts Them as Investors" are only partially supported within the article itself, because although the data provided by Vanguard and his inclusion of a few academic studies provide some evidence, he does not parse them in much detail, and instead tends to repeat his central claim, occasionally using a quote to say the same thing with slightly different wording. However, an examination of other critical literature regarding individual investment habits and the personality traits that inform them shows his argument to be sound.
The Vanguard data presented in the article only further demonstrates the tendency for men to make confident financial decisions even without any justification for that confidence, a tendency that has been analyzed more deeply in studies like Grinblatt and Keloharju's. However, Sommer's article does go marginally further than other studies in proposing possible reasons behind this tendency, finding evidence for overconfidence in men as a result of differing stimulus-response in the nucleus accumbens, increased testosterone, and developments in evolutionary psychology coupled with gender bias which may have benefited risk-taking in men while encouraging risk-aversion in women.
Barber, Initials, & Odean, Initials. (1999). The courage of misguided convictions. Financial Analysts Journal, 55(6), 41-55.
Dhar, R, & Zhu, N. (2006). Up close and personal: investor sophistication and the disposition effect. Management Science, 52(5), 726-740.
Grinblatt, M, & Keloharju, M. (2001). What makes investors trade?. The Journal of Finance,
Grinblatt, M, & Keloharju, M. (2009). Sensation seeking, overconfidence, and trading activity.
The Journal of Finance, 64(2), 549-578.
Kumar, a. (2009). Who gambles in the stock market?. The Journal of Finance, 64(4), 1889-
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