Women, wealth, and behavioral biases: Navigating financial decision-making with confidence

Women wield tremendous financial firepower. We make 85% of spending decisions as the primary purchasers for our households. We control about $11 trillion, or 31% of household assets in the U.S., and all indications point to this share of wealth continuing to rise throughout the decade.¹

This financial profile comes as a product of a few important factors. Today, women are equally likely to be head of household and thus chief decision-maker on all financial questions.² We earn the same as or more than our partners in 44% of relationships.³ And given the disparity in life expectancies, we are more likely to be the surviving partners.

Shaping meaningful plans and the investment strategies to achieve them is a necessary complement to this financial profile if we intend to be prepared for life’s major milestones and transitions.

Learning, habits and choices

Admittedly, we learn to earn, spend, and save as we mature, while the opportunity to learn about investing is a dedicated endeavor. But there’s good evidence that women are better investors, and the reason boils down to a critical behavioral bias.

A now-legendary paper written by researchers from the University of California studied the stock trading data of 35,000 self-directed brokerage accounts during the 1990s. They uncovered significant differences in trading habits: men traded 45 percent more than women and, as a result, produced poorer performance. Combined with survey results, the researchers attributed this gap to overconfidence, or an irrational degree of confidence in one’s abilities, in this case, to improve performance by trading stocks.⁴

Before we take a victory lap, it’s worth remembering that women can also fall prey to overconfidence, and that we’re all subject to a raft of behavioral tendencies that can steer us toward flawed financial decisions.

Take, for example, the paradox of choice. We’re all familiar with the eroding patience and increasing despair that arises when faced with too many options while trying to make a decision. Every new piece of information seems to increase the number of choices rather than reduce them. We share an ideal that more choices should be better, but the reality is that we succumb to choice overload.

Breaking down the biases

Setting an investment strategy can be loaded with too many choices. Research suggests that people who seek to make the best possible decision, as opposed to a merely satisfactory one, are particularly prone to struggle when faced with a wide variety of choices.⁵ Not to mention the stakes appear high when we’re talking about major financial goals.

One last point on behavioral biases: consider our “aversions” and how they hold us back. Loss aversion is the powerful tendency to avoid decisions that could lead to financial loss. Some of the earliest research on financial biases found it’s more powerful than greed, meaning we’d rather avoid losing money than we would prefer to gain an equal amount.⁶ It’s a type of regret aversion, which can take two forms: regrets of commission, or from carrying out a decision, and regrets of omission, or inaction.

A complete financial profile

We’re human. We get that it’s easier to avoid taking action than potentially make the wrong decision. Most people feel the same way and are equally unsure about next steps.

The answer is not to settle for a mediocre investment strategy, or to avoid setting one at all. Quite the contrary. As with most complex decisions, we need to determine the right “choice architecture” if we want to achieve the best possible outcome. This means setting parameters that account for behavioral biases and help narrow your options to those that make sense for your plans. Since women tend to be less willing to take financial risks, it’s important to know when and how sensible, calculated risks stand to benefit your long-term financial wellbeing.⁷

The good news is that, given some thought, we can answer many of the questions that will help create this choice architecture.

Your investment strategy is a product of your financial plans, which means we need to establish your goals and priorities first. Then we need to quantify them: what’s the financial scope and time horizon for your goals?

Armed with this information, we can begin to create an investment strategy to achieve your plans. This means maximizing your financial resources, perhaps for multiple purposes over a variety of time frames.

The investment portfolios we create to enact your strategy may evolve as your goals draw nearer or change. After all, portfolios are a product of the goals they’re designed to achieve, as well as your financial profile, both of which can evolve.

Setting a well-defined investment strategy will illuminate the path to achieving your major financial goals. Done right, it can eliminate a wide swath of biases and flaws from the decision-making process and turn your vision of financial success into reality. Ultimately, the stress of open-ended financial decisions can give way to peace of mind as your plans translate into action.