#11 Boys will be Boys: a Critical Appraisal. Lee Bishop. Newcastle University

Transcription

1 #11 Boys will be Boys: a Critical Appraisal Lee Bishop Newcastle University I have chosen to critically appraise the paper: Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment. This article was selected from the recommended bibliography of papers. This critical appraisal presents my own views on the selected paper. Due to limitations on space an extensive literature review is not possible; see Barber and Odean (2010) for references and papers supporting their hypotheses and theory. The market does not beat them. They beat themselves, because though they have brains they cannot sit tight. Jesse Livermore ( ) Barber, B.M., & Odean, T. (2001). Boys Will Be Boys: Gender, Overconfidence and Common Stock Investment. Quarterly Journal of Economics, 116(1),

2 The size of the world stock market was recently estimated as $46.8 trillion (Bloomberg, 2010.) In recent times the market has become increasingly accessible and as a result a new market of global online trading through NASDAQ has emerged. This shift can explain why in 1977 there was an annual turnover rate of 18% on the NYSE compared to an annual turnover rate of 78% in 1999 (NYSE, 2000). This turnover rate cannot be explained by rational trading, and irrational trading (trading which violates the economic principle of preferring more to less) leads to a reduction in expected utility. In order to investigate this phenomenon Barber and Odean (2001) investigated trading behaviour by looking at gender in relation to stock investment and performance using records from a broker. They presented two hypotheses about trading in equity markets which are as follows: 1. Men trade more than women 2. By trading more men hurt their performance more than do women I will discuss the demographics of the sample before looking at the methodology applied and then the results. The overconfidence explanation of irrational trading will then be critiqued; and finally I will present an alternative explanation for the results and with it a suggestion for further research before making concluding remarks about the paper. Sample Demographics and Methods Barber and Odean (2001) used the records of a brokerage to analyse the investments of 37,664 households for which the gender of the person who opened the account could be identified. Within the sample they were able to analyse further data such as marital status, age, income and proportion of income invested in stocks for a large number of the households. The sample contained 29,659 male households (19,741 supplied marital status as married and 6,326 as single) and 8,005 female households (4,894 gave marital status as married and 2,306 as single.) In the sample women had a lower net worth and income than men though this difference was not large. Men opened their accounts an average of 4.7 years

3 before the sampling period compared to 4.3 years for Women, however only 47.8% of women self-reported extensive experience in trading compared to 62.5% of men. Methods Barber and Odean looked only at the common stock investments from 1991 to 1996, excluding other investments. Annual turnover was calculated by one half the monthly sales turnover plus half the monthly purchases turnover across the year. Gross and net abnormal returns were calculated using their own formula and net-returns took into account variables such as market impact, commissions and the bid-ask spread for each trade. The effect of trading on performance was calculated by using households start of year portfolio as a benchmark against which to compare their annual returns. Results Statistical analysis revealed the mean annual turnover for males (77%) was significantly higher than females (55%) at the 1% level. Male net own-benchmark returns were significantly lower than females (males %, females %) and both sexes returns significantly underperformed (at 1% level) compared to their start of year portfolios. Differences in net own-benchmark returns were statistically larger between single males and females (single females , single males ) compared to married males and females (married females , married males ). These results support both hypotheses and show that men and single men in particular are more likely to trade, despite the fact that this excessive-trading reduces expected utility. Overconfidence as the reason for irrational trading? Barber and Odean explain these results in novel way as a consequence of overconfidence. They do so based on a wealth of literature suggesting people are most overconfident on difficult, unpredictable tasks lacking rapid feedback such as common stock investment (Yates 1990; Griffin and Tversky 1992). A variety of research also suggests males

4 are generally more overconfident than females (Deaux and Emswiller 1974) and that this is particularly noticeable on tasks where immediate-feedback is lacking (Lenney 1997). To their credit the authors discuss and discard numerous alternative explanations for the turnover and performance differences throughout the paper. Their own statistical analysis revealed no significant effect based on the presence of children in a household or household income. Age was shown to influence the results, own-benchmark net returns were significantly higher (1% level) as the sample aged, however a cross-sectional regression reveals that age does not explain this difference as effectively as increased turnover, and further exploration of the results reveals that the age differences were merely correlated with significantly decreased turnover (1% level) as age rose. Security selection does not explain the differing net-returns as there are no significant differences between the sexes with regards the performance of purchases compared to sales on a trade by trade basis. In the authors words both men and women detract from their net by trading, men simply do it more often. Trading for entertainment is proposed theoretically but then cleverly dismissed as a practical explanation with the revelation that individuals spend 4% of their income on all entertainment expenses compared to the calculated mean of 13% of household income invested by those within the sample. The incentive to trade at a loss for entertainment is just not a plausible explanation. Risk-aversion is also discounted, on the basis that although less risk-averse individuals will trade more frequently, rational investors should improve their performance regardless of annual turnover. Barber and Odean do raise the potential that mutual fund managers often trade to look busy but they conclude that this is probably driven by overconfidence in their ability to out-perform the market, rather than cynicism. Everything taken into account overconfidence is a sound explanation for the results. However, throughout the paper marital status is only used (cleverly) to identify single individuals for whom there is no chance of being influenced by their spouse. I believe marital

5 status is potentially very influential and propose that the differences in turnover and net return could be instead explained by differences in the reasoning and motivation of the differing demographics leading to a differentiation in investment tactics and strategies utilised by those who are single and those who are married, and between the sexes in each group. It could be that males invest more recklessly than females when single in an attempt to acquire status and resources to attract females. This is just an example, but it is logical that different demographics will behave differently and the variable should not have been under-estimated. My theory could be tested in an academic setting over a series of sessions with a sample of similarly experienced investors of varying marital status, using fictional money in a program modelled on the stock market. Whilst this would be less ecologically valid and would usually be undesirable, in this scenario it would detach the investors from real world benefits and consequences of investments. If the results follow the same pattern as this study then that would support Barber and Odean s overconfidence explanation, as such overconfidence should remain present in a fictional stock market. However, results could reveal that in a consequence-free environment there are no differences between individuals of varying marital status and sex in which case the overconfidence explanation of trading would have to be reconsidered and revaluated as a satisfactory theory. Conclusion The paper would have benefited from a more concise writing style, as several statements were unnecessarily repeated throughout, however the authors discussion within the paper was well considered and supported by extensive previous research. The study itself used an extensive longitudinal sample of real-world transactions placed by experienced investors. The hypotheses were presented clearly, explained satisfactorily and supported by careful statistical analysis. I could find no methodological flaws in the design and so conclude the paper to be of a very high quality.

6 Bibliography Barber, B.M., & Odean, T. (2001). Boys Will Be Boys: Gender, Overconfidence and Common Stock Investment. Quarterly Journal of Economics, 116(1), Deaux, K. & Emswiller, T. (1974). Explanations of Successful Performance on Sex-Linked Tasks: What is Skill for the Male is Luck for the Female. Journal of Personality and Social Psychology, 11, Griffin, T. & Tversky, A. (1992). The Weighing of Evidence and the Determinants of Confidence. Cognitive Psychology, 24, Lenney, E. (1997). Women s Self-Confidence in Achievement Settings, Psychological Bulletin, 84(1), Ouillet, D. (March 23 rd 2010). World Market Cap at $46.8 Trillion. Retrieved 9 th November, 2010, from trillion.html Share ownership (2000). Retrieved 8 th November, 2010, from Yates, J, F. (1990) Judgement and Decision Making (Englewood Cliffs, New Jersey: Prentice Hall.