Why Real Men Can't Make Money in the Market

An amazing number of male investors are -- how can I put this delicately? -- half-thinking alpha monkeys who want to grunt and club their way to riches.

That's a conclusion borne out by the e-missives I receive from investors. They're often ticked off that I've panned Sirius Satellite Radio (Nasdaq: SIRI  ) or pointed out the predictability of Crocs' (Nasdaq: CROX  ) recent 50% drop, and they're writing to swear a bit, and maybe make a few threats. Often, I get email from holders of companies like Pegasus Wireless or Overstock.com (Nasdaq: OSTK  ) , in which investors explain that they're willing to hold stocks that are being slaughtered because they think doing so "combats" some perceived market evil, shorting, naked-shorting, or whatever.

I've always been interested to notice that a huge portion -- oh, 100% or so -- of this seemingly irrational, irate subgroup of poor financial decision-makers is, in my experience, male. Turns out, there may be a very good reason: Too much testosterone can cloud our financial judgment.

Knuckle-dragging decision-making
You don't need to take my word for it. Back in June, The Economist discussed a study that proves it. In the experiment, subjects played a simple game in which pairs of players divided and received money from a central pot. One player would propose how to split the pot -- and the other player would decide whether to accept -- for instance, $35 for the splitter and, $5 for the decider. If the decider accepted, both took their cuts. If the decider refused, neither got any money.

An economically rational decider would always accept the offer, no matter how low, because any payoff is more than zero. In practice, something gets in the way, and deciders will sometimes rather take nothing at all than accept an offer considered too low.

Manlier men make less money
Here's where it gets interesting. In this version of the experiment, the players' testosterone levels were checked, and those with higher levels of testosterone were more likely to reject the low-ball offers of money. According to The Economist, "The responders who rejected a low final offer had an average testosterone level more than 50% higher than the average of those who accepted. Five of the seven men with the highest testosterone levels in the study rejected a $5 ultimate offer, but only one of the 19 others made the same decision."

In short, too much testosterone got in the way of their making the most obvious, and profitable, financial decision. There are plausible explanations for this, such as the fact that our brains evolved not to make one-off decisions like these, but rather to consider consequences for the future, such as the possibility that accepting a low-ball offer may compromise our status, making us more susceptible to future low-ball offers. (We're worried about being perceived as pushovers.)

Thus, hormone-driven decision-makers seem unable to resist the notion that refusing the low offer will enhance their status for the future -- even when it's clear, as it was in this game, that there is no repercussion for the future. Such people are not exactly irrational, but they're certainly not being rational in a way that benefits their personal, financial bottom line.

Money meets the market
Unfortunately for the manly men, there's no such thing as status in the stock market. There are no benefits for face-saving, testosterone-addled decisions. If you refuse to sell your shares of faltering GM (NYSE: GM  ) because you're insulted by the market's low bid, or because you want to defend American enterprises against the likes of foreign producers like Toyota (NYSE: TM  ) , the market doesn't notice.

When you make a decision to buy Under Armour (NYSE: UA  ) instead of old-school Nike (NYSE: NKE  ) because your favorite bone-crushing linebacker is sporting that UA logo, the trader across the table doesn't care which team you think you're on.

Foolish final thought
Are you trading on testosterone? Short of heading to the lab for a check, none of us knows for sure. But we can work hard to be certain that every stock pick we make is driven by dispassionate data rather than unbridled hormones.

That's exactly the tack taken by my colleagues at Motley Fool Inside Value, where buy and sell decisions are always based on painstaking research and cold calculations of the odds. In fact, lead analyst Philip Durell appreciates the occasional testosterone-storm, at least when it confuses the rest of the market and offers up great companies at good prices.

If you'd like a free look at how Inside Value beats the market by concentrating on what matters -- the money -- a 30-day risk-free trial is a click away.

Seth Jayson still doesn't have enough testosterone to grow a bad teenage mustache. At the time of publication he had no positions in any company mentioned here. Under Armour is a Motley Fool Rule Breakers recommendation. View his stock holdings and Fool profile here. Fool rules are here.


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