Why Men Are Terrible Investors (And Lose 1% More Than Women Every Year)

Tyler Gardner (0:00)

Here's the brutal truth in investing. Doing nothing is doing something. Staying the course through market volatility is an active decision, even though it doesn't feel like one. Hello friends, this is Tyler Gardner, welcoming you to another episode of Your Money Guide on the Side, where it is my job to simplify what seems complex, add nuance to what seems simple, and learn from and alongside some of the brightest minds in money, finance, and investing. So let's get started and get you one step closer to where you need to be. Welcome back to Your Money Guide on the Side, the podcast where we try to make sense of your money without putting you to sleep in the process. Though I make no promises and yes, last week I did get an email asking if my channel was actually in ASMR channel. If you don't know what that is, look it up. Kind of interesting. No, it's not, but thank you for the compliment. I'm genuinely delighted you're here for another episode, which either means you found last week's discussion useful, or you've developed a concerning addiction to financial podcasts. Either way, I'll take it and I love it. Before we dive in, as always, if the show has been helpful to you, if it saved you from a bad investment decision or helped you understand something that previously made your eyes glaze over, or simply somewhat entertained you during your commute, it would be amazing if you considered leaving a review on Apple Podcasts or wherever you're listening. Reviews help other people find the show, and frankly, they help me feel slightly less like I'm that kid from Wet Hot American Summer who's talking into a radio station microphone that's not ultimately connected to anything. All right. Today, we're going to continue what we started last week. But this week, we're rolling out the 2 version of behavioral biases that are costing you money and mental stability. If you didn't catch last week's episode, you can either go back and listen to it first, or listen to them in either order. They stand alone, but also complement one another and are meant to build on one another to offer you a complete theoretical understanding and practical approach to thinking through these behavioral biases and how such behaviors impact us as investors, and more importantly, as people trying to make each day just a bit easier on ourselves. So here is part two in our series of behavioral biases that are killing your portfolio returns. And last note before we get started, if you want a brief history of what we'll be talking about today, some of the names and academic jargon and reasoning behind how we've come to think about these things, you can go back and listen to part one from last week as it's all there in all of its glory. This week, we're cutting right to the good stuff.

Last week, we hit on some of the greatest hits of behavioral biases, confirmation bias, overconfidence, recency bias, loss aversion, and endowment bias. These are the Beatles and the rolling stones of behavioral economics. Most people know about them, even if you can't name them. They're discussed endlessly, and they absolutely deserve their fame and attention. But today, I want to introduce you to five behavioral biases that don't get as much airtime, but are quietly devastating your portfolio day, after month, after year. Think of these as even deeper cuts, the album tracks that true fans absolutely appreciate. Bias number one, the disposition effect, or why we love our losers and abandon our winners. The disposition effect is the tendency to sell investments that have gone up in value, while holding on to investments that have declined. On one hand, you might be saying, but wait, this is a good thing, don't we want to buy low and sell high? Sure, but this is where the nuance comes in. With the disposition effect, what we're doing is taking our profits too early, and holding our losses too long. It's like leaving a great party early because you're having fun, but staying at a terrible party until 3am because you already paid for parking, and you think that it's just a matter of a few more minutes or late night beverages until the real fun is bound to begin. This was first documented by economists Hirsch Schaffrin and Meier Stappmann in 1985, and subsequently confirmed by studies of actual trading behavior. One famous study by Terrence O'Dean analyzed over 10,000 brokerage accounts and found that investors were about 50% more likely to sell a winning investment than a losing one. But here's where it gets interesting. The stocks investors sold then outperformed the stocks they continued to hold by about 3.4% over the following year. Let that one sink in. We actively, reliably choose the worst option. But why? The answer lies in how we experience gains and losses. Selling a winner feels good, and it feels like you're doing what the textbooks have told you to do. It's a realized gain, a victory you can point to. Look at me, your brain says. I'm Warren Buffett's younger, more attractive sibling. Selling a loser, meanwhile, means admitting you might have been wrong. It transforms a paper loss into a real one, and our brains hate that. So we hold, hoping it'll come back, engaging in what I call denial-based portfolio management. The disposition effect is particularly insidious because it feels prudent. I'm taking profits, sounds responsible. I'm being patient with underperformers, sounds wise. But you're actually doing the exact opposite of the investing wisdom cut your losses and let your winners run. You're cutting your winners and letting your losses run, which is rather like watering your weeds and trimming your flowers. Here's how to fight it. Implement rules-based rebalancing. Decide in advance when you're calm, rational, and not staring at a red portfolio, that you're going to rebalance back to your target allocation once or maybe twice a year. Also, as we noted last time, stop checking your portfolio daily. I know, I know, it's right there on your phone taunting you. But the more often you look, the more likely you are to see short-term losses, which triggers this disposition effect. Ignorance in this case isn't bliss. It's a systematic advantage.