Nov. 28, 2011— -- Women are better wired than men to avoid emotionally driven investing mistakes.
This conclusion, by Richard L. Peterson, a psychiatrist who studies the role of emotions in investing decisions, would likely be rejected as ludicrous by the huge male egos on Wall Street. Yet these masters of the universe should know that Peterson's findings aren't based on inference or speculation. Rather, they're supported by neuroscience.
Peterson found evidence through a study of thousands of investors that because women are more in touch with their feelings, they're more able to control how their emotions might weigh on their investing decisions and to avoid mistakes. His research has been published in leading academic journals.
The good news for men is that they can reduce these mistakes by getting more in touch with their feminine side. "If investors carefully examine their feelings when they make decisions and review them later, they can improve their process," says Peterson, author of Inside the Investor's Brain (Wiley Trading, 2007) and co-author of MarketPsych: How to Manage Fear and Build Your Investor Identity (Wiley Finance, 2010).
Peterson's findings, summarized in a white paper, challenge the classic financial rule that emotions have no place in investment decisions. He has found that the role of emotions in investing can actually be positive — if you're sufficiently aware of them.
His research is based on brain scans of subjects showing emotional changes in color-coded images. These scans show spikes in fear or greed, indicated by increases in blood oxygen levels, stemming from increased uncertainty or new information during simulated investing scenarios.
"Emotions are central to all financial decisions," says Peterson, who has compared the scans of successful investors to those of average ones. "Mistakes happen when there is too much emotion, causing investors to overreact to new information by buying or selling when they shouldn't. We see this in the brain imaging. But we also see that mistakes occur when there isn't enough emotion."
By this, Peterson means that investors often aren't fully aware of emotions driving their decisions. If you attempt to be completely objective by blocking out all emotion, he says, you won't recognize your feelings. As a result, you won't be able to temper the impact of emotion on decisions or to actually use it to make better decisions.
"Sigmund Freud found that if you repress emotion, it will eventually come out in other ways," Peterson says. "You have to recognize the emotions that you're feeling. By understanding what you're feeling you can overcome or reduce the tendency to be driven by these emotions in your decision-making. But if you deny the existence of these emotions, they'll come back to haunt you."
For men, Peterson has found, this emotional boomerang comes back more often. "Men, being characteristically more prideful and overconfident, tend to take too much risk, and they over-trade," says Peterson, managing director of MarketPsych LLC, a training firm for financial advisors.
"When they're making money, instead of letting winning stocks run, men are more likely to sell too soon because they want to feel good about themselves," he says. "They don't have a demonstrable winner until they sell at a profit. And more than women, men are predisposed to leave their losers open because they want them to rebound. For men, mistakes are harder to admit."