Confidence is a great quality to have when you're performing surgery, but as a step toward wise investing it is a vastly overrated trait.
It can encourage us to trade stocks too frequently or take too much risk because we are sure that the future will unfold exactly the way we see it. Confident investors tend to be underperformers – and, all too often, men.
It is no secret that men and women tend to invest differently. A survey from Bank of Montreal, released on Tuesday, added to the evidence.
It found that a remarkable 83 per cent of men feel confident when investing. That compares to just 68 per cent of women who feel confident.
The bank makes it clear that the gap should narrow.
"It's incumbent on women to take on more responsibility to become more educated and confident investors," said Julie Barker-Merz, president of BMO InvestorLine, Bank of Montreal's online brokerage, in a release. "The financial services industry also has a role to play in this by helping women get the support they need to fulfill their financial goals.
It sounds nice, especially if it encourages women to take an interest in their own financial health. But why boost confidence when women appear to be doing just fine without it?
Any discussion on the distinctions between male and female investors starts with a landmark 2001 research paper by University of California finance professors Brad Barber and Terrance Odean, entitled, "Boys Will Be Boys: Gender, Overconfidence, And Common Stock Investment."
Drawing on the account data for more than 35,000 investors at a discount brokerage from 1991 to 1997, the professors discovered some astounding differences between men and women.
The biggest one: Men trade stocks an amazing 45 per cent more than women, and single men are even more prolific. The costs associated with this active trading reduces the net returns of men by about 2.7 percentage points a year, or far more than the drag on women's returns, making men chronic underperformers.
"We believe there is a simple and powerful explanation for high levels of trading on financial markets: overconfidence," the professors said.
Men tend to have more of it, they added: "Psychologists find that in areas such as finance men are more overconfident than women. This difference in overconfidence yields two predictions: men will trade more than women, and the performance of men will be hurt more by excessive trading than the performance of women."
They found plenty of evidence to support both predictions.
You can quibble with some of the terminology here. While "confidence" in the BMO survey implies an appropriate acknowledgment of your skill, the "over-confidence" label used by the finance professors in their paper implies that you are delusional about your abilities.
But keep in mind that a survey would never ask someone if they are over-confident, because the answer would nearly always be no.
And more importantly, any quibbling distracts from the bigger point: When it comes to investing, it is a good thing to feel some doubt about your skills.
Doubt will drive you to diversify your holdings and it will encourage you to hold stocks for the long term rather than constantly swap one stock for another in an attempt to boost your returns.
Women shouldn't invest like men; men should invest like women.