Investment: watch out for stereotypes!

Amid an ever-expanding choice of financial products, solutions exist to suit every investor profile, but being spoilt for choice can be confusing and lead to decisions based on stereotypes that we find reassuring, for example those relating to gender. But does a female investment strategy actually exist? Can we guess an investor’s gender by looking at the composition, movements and performance of their portfolio? Close examination shows such deep-rooted prejudices are not founded in reality.

It may be true that women and men often follow different trajectories in their personal and professional lives, but that’s not a reason to embrace marketing tropes drawing on stereotypes that might not be well founded in reality. The starting point should be that whatever your gender, the most important priority is to devise a strategy based on the specifics of your investor profile.

What do you have in common with a woman pictured in the glossy pages of a prospectus extolling the virtues of a supposedly ‘female’ financial product? Probably nothing. Similarly, being a 40-year-old man with a healthy bank balance doesn’t necessarily make you innately inclined to follow an aggressive investment strategy. Would it really help you secure your personal life goals?

Clichés rather than a hard-and-fast reality

Most financial products aimed at women are devised on the basis of research indicating that women are more averse to losses than men, which is taken as proof they have a lower risk appetite. However, the conclusions of such studies should not necessarily be accepted at face value. They often draw on theoretical testing of subjects that is divorced from real-world activity and may lack context. By contrast, studies on financial decision-making conducted under real-world conditions have failed to identify any significant gender-based differences in risk-taking.

How can we explain this discrepancy and why do levels of risk appetite sometimes differ between men and women? Behavioural economics has comprehensively demonstrated that people are rarely objective and rational in their decision-making. Factors such as the context, social norms and the environment all have a role to play.

We have a tendency to conform to what we see as social norms, even if they run counter to our personal preferences and even our own interests.

With social norms, stereotypes can be powerful catalysts for decision-making. Risk appetite and loss aversion are particularly likely to be influenced by stereotypes. We have a tendency to adjust our behaviour to conform to what we see as social norms, even if they run counter to our personal preferences and even our own interests. That’s a key reason why some investors allow their decisions to be swayed by gender-based clichés.

Women are often portrayed as far more conservative and timid investors than men – when they’re brave enough to invest at all – an assertion based on various assumptions that do not necessarily hold water. The argument goes that women are less inclined to take risks, less knowledgeable about finance, and less proficient in mathematics than men, and that these differences may be down in part to biological or hormonal factors.

These stereotypes would be less important if they did not affect behaviour in the real world. Some women may hear such assertions so often that they unconsciously internalise them, sapping their self-confidence and in turn affecting their investment behaviour.

Internalised stereotypes and persistent discrimination

A lack of female role models in the investment world leaves many women drawn to products presented as specially designed by and for women. Why? Because they are looking for reassurance. The stereotype of the female investor is so effectively presented in this way that it can be perceived as a social norm and create a self-perpetuating cycle. The consequences of this are not confined to the investment world; it may affect access to managerial posts that call for risk-taking.

Many women are systematically pointed towards investment solutions that are extremely conservative and offer less potential for long-term gains than riskier products.

Female investors aren’t the only ones who may embrace this stereotype; it can also be a trap for advisers and businesses that offer them certain investment products and services. As a result, many women are systematically pointed towards investment solutions that are extremely conservative and offer less potential for long-term gains than riskier products.

Gender stereotypes do not only affect women. One should also treat with suspicion studies that make generalisations about what are typically considered masculine personality traits, such as greater risk appetite and impulsiveness, which can lead to a tendency to sell portfolio positions too quickly in the event of a downturn in value.

This investor profile definitely exists, but it is not just a boys’ club. Men can be analytical investors and just as uncomfortable with aggressive investment strategies as their female counterparts. Equally, women can be impulsive.

Context as key to stress-free investing

Investors should try to avoid rigidly adhering to the norms they perceive, but instead seek the best possible solution for their profile (which does include risk appetite). It can be very helpful to ask a specialist you trust, such as your banker, to present all the possible options in a neutral and objective way, setting out their advantages and drawbacks.

Never lose sight of the fact that context has a major impact on ’individuals’ decision-making, and ultimately their investment performance, too. An international team of researchers led by Italian-American economist Paola Sapienza examined the stereotypical view that women are less mathematically gifted than men, finding that it was down to women being underrepresented in scientific careers and maths in particular. Without role models to look up to, girls are naturally drawn towards other academic disciplines. These prejudices can even be unwittingly perpetuated in the home, where girls are rarely encouraged to pursue mathematical careers.

However, these cultural prejudices have no evidential basis. Girls in a more neutral, nurturing educational environment, or in a society that places greater emphasis on gender equality, perform exactly the same way in mathematics and related subjects as boys of the same age.

There are parallels with the process of investing for women. Women are less likely than male counterparts to embrace investment, probably because they lack female role models and are bombarded with marketing assumptions that do not reflect their reality. Once they have taken the plunge, though, seasoned female investors take risks as often as their male peers.

A person’s risk profile, their personal, professional and financial situation, and their plans in life, should be the critical factors – not their gender – in choosing an investment strategy.

Taking control

Ultimately the question of whether men and women are from Mars or Venus doesn’t really matter. From an investment perspective, the key issues are who you are, your circumstances, and your goals as an individual. A person’s risk profile, their personal, professional and financial situation, and their plans in life, should be the critical factors – not their gender – in choosing an investment strategy.

That applies to choosing an investment product. None is perfect in absolute terms; there are plenty that correspond to your profile and personal preferences, while others will not suit you at all. It’s a case of finding a dispassionate environment in which you can speak in confidence with a specialist who won’t try to fit you into a stereotypical box, but offer human warmth and inspire trust.

Defining your risk profile should not be viewed as a legal requirement, but an important task for your own benefit to be undertaken as objectively possible, by answering each question clearly and independently, in order to help your banker offer you well-informed and effective guidance.

Whether you’re a man or a woman, it’s vital to take control of the investment process and express your personal preferences, rather than being bound to a stereotype on the glossy pages of a prospectus.