Terry Odean: Who's on the Other Side of the Trade?

Our guest on the podcast today is Terrance Odean. Dr. Odean is the Rudd Family Foundation Professor of Finance at the Haas School of Business at the University of California, Berkeley. Individual investor trading has been a key area of research throughout his academic career. In 2016, Dr. Odean received the James R. Vertin Award from the CFA Institute for research notable for its relevance and enduring value to investment professionals. He has been an editor and an associate editor of numerous academic finance journals, including The Review of Financial Studies, The Journal of Finance, and The Journal of Behavioral Finance. As an undergraduate student at UC Berkeley, Dr. Odean studied judgment and decision-making with a 2002 Nobel Laureate in Economics, Daniel Kahneman.

Background

Bio

The Review of Financial Studies

The Journal of Finance

The Journal of Behavioral Finance

Free Trading and Robinhood

“Online Investors: Do the Slow Die First?” by Brad Barber and Terrance Odean, faculty.haas.berkeley.edu, 2002.

“The Behavior of Individual Investors,” by Brad Barber and Terrance Odean, umass.edu, September 2011.

“Attention Induced Trading and Returns: Evidence From Robinhood Users,” by Brad Barber, Xing Huang, Terrance Odean, and Christopher Schwarz, paper.ssrn.com, Oct. 12, 2021.

“Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors,” by Brad Barber and Terrance Odean, faculty.haas.berkeley.edu, April 2000.

“All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors,” by Brad Barber and Terrance Odean, academic.oup.com, April 2008.

“Robbin’ Who?” by William Ehart, humbledollar.com, May 11, 2021.

“Systematic Noise,” by Brad Barber, Terrance Odean, papers.ssrn.com, May 2006.

Gender Differences in Investing

“Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment,” by Brad Barber and Terrance Odean, papers.ssrn.com, November 1998.

“Seeing Is Believing: Female Leaders’ Presence Narrows the Gender Gap in Girls’ Aspirations and Advancement in Education,” by Lori Beaman, Esther Duflo, Rohini Pande, and Petia Topalova, gap.hks.harvard.edu, February 2012.

“What Accounts for the Gender Equality Among Pharmacists?” by Claudia Goldin, premarket.org, Oct. 7, 2021.

Behavioral Finance

Daniel Kahneman

Christine Benz: Hi, and welcome to The Long View. I'm Christine Benz, director of personal finance and retirement planning for Morningstar.

Jeff Ptak: And I'm Jeff Ptak, chief ratings officer for Morningstar Research Services.

Benz: Our guest on the podcast today is Terrance Odean. Dr. Odean is the Rudd Family Foundation Professor of Finance at the Haas School of Business at the University of California, Berkeley. Individual investor trading has been a key area of research throughout his academic career. In 2016, Dr. Odean received the James R. Vertin Award from the CFA Institute for research notable for its relevance and enduring value to investment professionals. He has been an editor and an associate editor of numerous academic finance journals, including The Review of Financial Studies, The Journal of Finance, and The Journal of Behavioral Finance. As an undergraduate student at UC Berkeley, Dr. Odean studied judgment and decision-making with a 2002 Nobel Laureate in Economics, Daniel Kahneman. Dr. Odean, welcome to The Long View.

Terrance Odean: Thank you. Thank you for inviting me.

Benz: Well, it's great to have you here. You've long researched the topic of how well individual investors do at stock trading. We've seen this big influx of new investors into the market over the past few years. What's your outlook for them? Do you think things will end badly?

Odean: Will things end badly? I think many investors are trying out trading, they are trading more actively than is probably in their best interests from a strictly financial point of view. And so, it depends a little bit on who the investor is and what their goals are. I'd say the active trading is not the appropriate way for most people to invest for retirement, for long-term goals. It's more, to be quite honest, a form of entertainment. And thus, if you are trading quite actively with money that you can afford to play with, there's no great harm done. However, people who are incurring small losses because they trade actively, they can observe these, they can decide, do I want to continue doing that? There are, of course, investors who incur larger losses than they thought were possible and that can be tragic. And there's some chance that the market will come down a fair amount and that investors who had come to the conclusion it only went up, will be disappointed. But we've certainly seen that before. A little over 20 years ago, during the dot-com boom, prices went up pretty consistently for several years, and then came down very quickly. And a lot of individual investors lost money in that crash.

Ptak: There's a fairly large body of research to which you've contributed that novice investors trading stocks is a combustible mix and unlikely to lead to good outcomes, yet we still see a lot of the brokerage firms encouraging this behavior through ads and other means. What are some of the key motivations, especially because the overt costs of trading are zero in many cases? And so, it makes things like trading a bit of a loss leader for these firms. But what are the motivations there?

Odean: It's a couple of parts to that question. One question is, why would brokerage firms be encouraging active trading? And I think the answer is because they make money from active traders. And zero commissions does not mean zero profits to the brokerage firm. Not at all. I think it was last year, Robinhood had about $680 million in payment for order flow. That's money that they get paid by market makers, wholesalers such as Citadel, and VIRTU who pay discount brokerage firms to direct orders to their platforms where they trade against, for the most part, retail investors who they consider to be uninformed. So, the brokerage firms are making money on very active traders; they make less money than if they were also charging commissions. And it's possible that for some brokerage firms, eliminating commissions was simply something that they did to match firms like Robinhood, and that they're making most of their money elsewhere, through selling other products. But it's not the case that, Robinhood at least, doesn't make money because they don't charge commissions; they make money from trades.

Benz: Some of these new investors have no doubt been enticed by the opportunity to trade without commissions. You and Brad Barber have researched the removal of frictions like commissions. What kinds of behaviors do free or low-commission trading tend to encourage?

Odean: In general, if you remove an impediment from some activity people want to do, they'll do it more. I can give you a couple examples. Brad Barber and I wrote a paper many years ago, where we looked at people who switched from phone-based to computer-based trading, 27 years or so ago. These were investors who had been placing their trades on the telephone, now they were able to do so on a computer. And what we found is that they traded more actively and more speculatively after switching over. And that was not just for the first month or two, which you sort of expect, if you've bought a new service, you use it, or if you have a new service, you're likely to use it if you signed up for it. It's like if you have a new toy, you play with it. But what we felt was more important is that if you looked some months later, they were still trading more actively, and more actively than a control sample of similar investors who had not made the switch to computer-based trading.

That's one example. That was one innovation. And there have been many innovations. There was an an ad that E-Trade ran--it was probably around 1999--and there’s nobody in it; it was just a black screen with print, and a voiceover that said, “It's 3 a.m., and you want to make a trade for a fast-moving stock you've been following without waking your baby or your broker--it's time for E-Trade.” Maybe it was two in the morning. I used to show this to my students. I would say, “If you wake up with a brilliant idea in the middle of the night, or you wake up in a cold sweat, scared that the market's about to crash, go back to sleep either way. Don’t hop on your computer and buy a lot of some stock and don't sell everything.” Trading at 3 a.m., it's not necessarily a good thing for everyone.

So if you make something easier, people are more likely to do it. It's like ATMs, for a while people started to use cash more. When I was young, my mother would buy things at the grocery store with a check. And then people started to use credit cards, then ATMs made it easier to have cash than it had been. All of these things. And now with COVID, people stopped using cash to a large extent. Making something easier or harder tends to influence behavior. It's one of the reasons that in the classes I teach on personal finance I strongly urge the students to automate their savings. If you make it easy and automatic, it's more likely to happen.

When you tell people that there's no commission, and there's no commission, and no commission is cheaper than having commission, they're likely to trade more. You've reduced what we call the frictions. Just like if you make it easier to trade by having, say an app on your phone, where you can place a trade in five seconds or 10 seconds while you're stopped at a red light--not that I recommend doing so. That encourages more trading because it's easier. So, when things are cheaper and easier people tend to do them more.

Ptak: You wrote about the simplicity of Robinhood's user interface versus other brokerage platforms and made the case that it tends to lead to different behaviors. For example, investors are more likely to rely on intuition versus data. Can you talk about that?

Odean: Robinhood did a couple of things that were brilliant from a business model point of view. They took commissions down to zero. And commissions are very salient. So that encouraged people to join their platform and to trade with them. And they also made it extremely easy to trade, and they made it look fairly simple. One of the points that my co-authors and I make in a paper that we recently wrote about Robinhood, is that Robinhood displays a lot less data than many brokerage firms do on their website. And you guys are at Morningstar--part of what you guys do is make data available to people. Robinhood, for the most part doesn't emphasize that. So why does it matter?

Well, I imagine if I put myself in the place of a novice investor, and I go on a website, I think, “Oh boy, zero commission. I'm going to start trading.” And I go on the website, and I look up a company. And I see a lot of data being displayed that I don't really fully understand. I may say to myself, “Maybe I shouldn't be doing these trades, since there seems to be a lot of relevant data that other investors are looking at that I don't really understand.” On the other hand, if you go on the website or the phone for Robinhood--they may not be the only ones doing this, but they certainly were pacesetters in simplicity and not having a lot of confusing data. You go on and you look at it--there's just a little bit of information available. You say, “This looks simple, I'm going to trade.”

So, I think that there's the possibility that making it look simpler, encourages investors. Now, that's not to say that the investors necessarily are making better choices when they have a lot of data available. Because, in addition to having a lot of data available, you have to know what to do with the data. And essentially, who you're competing with in the market is professional investors who have access to that same data and quite likely more. I'm not suggesting that the investors would be making better trades if they had more data in front of them. But I think for new investors, not seeing all that complexity, makes them feel a little bit more confident that they can go out and act.

Benz: I wanted to follow up on that--on how providers or entities like Morningstar, how can we think about striking a happy medium, if we genuinely care about trying to encourage good outcomes for investors? How do we find that right balance of it's simple, it's understandable, but there's also enough there for me to understand what I'm doing and who I'm competing against? Do you have any thoughts on how to find that happy medium?

Odean: That's a tough question; it's a good question. And in part what makes the question difficult is that there's a wide range of investors out there. And to some extent, there's a range of investors, a range of experience and knowledge, and to some extent, also a range of goals. Now, I realized Morningstar these days probably has data on almost anything in the market that I might want data on. But my recollection is Morningstar started out focused largely on mutual funds, including ETFs, which are…

Benz: Right.

Odean: Right. And for most investors, mutual funds are the appropriate way to invest, to save for retirement. I'm not trying to say anything about this is for everyone, but in general, and in fact most investors should, in my opinion, focus more on the fees that they're being charged by the mutual funds that they invest in and focus on the appropriateness of the investments and not get caught up in things like last year's performance. That's a separate issue. But there's quite a tendency for investors in pretty much all asset classes to focus on recent performance and not pay enough attention to things such as fees.

Morningstar really did a great job. And I spent more time on the site a long time ago, when it was a newer company, making useful basic data about mutual funds available. And I would teach my students, I'd ask them, “Do any of you, especially if one of these older students, have mutual funds?” And people say, “Yeah, I do.” I'd say, “What are you paying in fees?” And the general response was, “I have no idea.” And I say, “How would you look it up if you want to know?” And the response to that was usually, “I have no idea.” Of course, you could get the perspective. People also had the response of, “I don't know, how do I get the prospectus? What is that?”

I would say to them, “There are two good, easy ways to look up your fees: Finra has a website where you can look them up; you can go to Morningstar, you can look them up. Those are great resources.” It gets more difficult. Mutual funds, appropriate investments for most investors. I'm including, when I say mutual funds, I mean both open-end mutual funds and exchange-traded funds. Not all mutual funds, or ETFs are equal. If you I think there are more ETFs out there now than there are common stocks that people can trade. And some of them are flat-out speculative bets, the sort of thing where they are leveraged 3-to-1; the price resets daily; you can go short or long. Those are just different ways to gamble. But there are a lot of mutual funds that are well-diversified and have reasonable fees.

While I am a fan of index funds, I also acknowledge there are some drawbacks to them. And we do need active management. I would argue that in the U.S., we probably have more than enough active management. By active management I mean mutual funds or money management companies that have analysts that are studying various securities and trying to figure out what the appropriate price is, and without such analysts then there's not much tethering price to the fundamentals of an asset or a company. I know this is a bit of a sidetrack--but I was in Beijing, probably about a decade ago, and gave a talk at their equivalent of the SEC. And afterwards, I was talking to the head of research. And I commented that, at the time at least, I thought that the Chinese market needed more actively managed mutual funds, because there the individual investors had, and I believe they probably still do have a great deal of influence on prices in that market. And you need some people in the market who know how to do things like discounted cash flow analysis, or the fundamental analysis of the value of a company.

I think there's a role for both actively managed and index funds. So, I think for most individual investors in the U.S., index funds are still a good choice. The difficult part comes when you start thinking about what you do for individual investors who want to trade stocks actively. You could discourage them from doing so, which might be in their own best interest but won't be in the firm's financial interest because active traders make money for brokerage firms. Probably also if you were at a firm that discouraged such trading, you'd be right if you said “Well, they'll go elsewhere and someone else will make these profits.” On the other hand, I think it's ethically somewhat questionable to actively encourage inexperienced investors to trade excessively. Again, the damage to the investors is potentially much worse when they're encouraged to trade derivatives such as options and futures contracts or take leveraged positions by buying on margin or to take short positions. And I believe, I'm not certain, but I believe that Robinhood, for example, does not allow shorting. Although I know they do have a lot of options trading and a great deal of their profitability comes from options trading.

So that's the tougher one, isn't it? What do you tell people? I'm working on a paper that looks at data from a company that has customers all over the world. And one thing my co-authors and I were looking at was when the European Union required companies to post a message saying that a certain class of products, I think 80% of the investors lost money investing in them. As far as I know, we don't do that in the U.S. But one way of a fair warning would be if someone estimated, for example, with futures contracts, what percentage of retail investors lost money trading futures and then display that information prominently. It might discourage a few investors from trading in these products--that would probably be a good thing. But I also expect that the effect would not be huge.

I started writing about this stuff in the mid-'90s. And I could remember being interviewed by a print journalist more than 20 years ago, after Brad Barber and I wrote a paper titled, “Trading Is Hazardous to Your Wealth.” And she said, “After you've published this paper, do you think that any retail investors are going to continue to trade actively?” And I said, “I'll be happy if two or three decide to trade less actively. As far as I know, not that many retail investors are subscribing to The Journal of Finance.” I would like to see some warnings about the riskiest behavior. I don't know how much difference it would make.

Ptak: What about the concept of a mad money account--that's a different approach to regulating some of these behaviors instead of that regulation of those controls being imposed at the provider level on the brokerage platform. Instead, it's the investor, him or herself, that's doing it by setting up this hived-off mad money account that they can use to get some of those energies out without cutting the rest of the plan to ribbons, so to speak, if they make mistakes. What do you think of that?

Odean: I have been encouraging that approach for at least 20 years. And what I generally say is you can get 90% of the thrills for 10% of the risk. To my students and in public talks, I say if you are trading because you enjoy trading, then separate that from your long-term investing for retirement. And one thing that I think it's worth mentioning is that a lot of the new investors in the market, a lot of the customers at Robinhood are young and many of them, not all, but many of them are probably playing with money that they can afford to lose a little bit of. I'm not saying that they will be happy about losing it, but it gets different as you get older and it gets really different if that's your retirement money.

I think it depends on what you enjoy doing. My siblings and neighbors are all solving Wordle puzzles every morning. That seems to make them very happy. On the other hand, some people are getting up and opening up their phone and placing a few trades on Robinhood--maybe that makes them happy. Wordle is free, and Robinhood, there's no commission. The thing is, if it's for entertainment, the stakes should be something that you can afford to lose. And you should mentally separate out the activity of investing for retirement, from trading for entertainment, just as very few people say to themselves, “I'm heading to Las Vegas for a week. I go there late every January to invest money on the roulette table.” That's not quite what they say, right? They don't confuse going to Las Vegas with retirement investing. They say, “I'm going to Las Vegas; I may lose a little money. I'm going to have some fun.” I think that's perfectly fine.

The problem when you say, “Let's put it on the investor,” is it's a little bit easy as a solution. It's “We've now told the investor that she shouldn't make trades that she can't afford to lose money on. So, it's no longer our responsibility.” But you know that not all investors are going to make that distinction and say, “I'm separating my trading for fun from investing.” And that some are going to end up chasing losses. So, I do think it's a good thing to encourage. But I don't think that if a brokerage firm simply says, “We strongly discourage you from actively trading with any money you can't afford to lose.” And then having said that, they do all they can to get you to trade actively--I would see that as somewhat cynical.

Benz: I wanted to go back to your research on Robinhood, specifically, which was fascinating. But I wanted to talk about the gamification aspect of Robinhood, which has been much discussed. But you wrote that gamification and simplicity, which Jeff referenced in a previous question, can influence trading behavior in ways that might redound to the detriment of investors. Can we delve into that gamification piece? It follows pretty logically from what you were just talking about--that if something seems fun, we probably might not take it seriously.

Odean: First of all, it's a great opportunity for me to mention that research. That paper was written with Brad Barber, and Xing Huang, and Chris Schwarz. So those are my co-authors. I appreciate the opportunity to talk with you, but the work on Robinhood is with my very good co-authors. The gamification--I'll tell you question that I ask my students. And it's a question I think generally people should ask when they're doing any trade that is somewhat speculative. And what do I mean by speculative? I mean you're buying a stock or an option or an ETF because you think it's going to outperform the market over a relatively short horizon, as opposed to what I think of investing, which is you're buying the S&P 500, or you're buying a well-diversified portfolio that you intend to own for many years because you think in the long run the U.S. economy is going to do well and that will be reflected in the market prices.

If you're speculating, if you are buying a futures contract, or even just speculating on a stock, a reasonable question is: Who do I think is on the other side of this trade? And in the U.S., most likely the counterparty, the person on the other side of your trade, is going to be a professional trader--actually, very likely a computer program owned by a big trading firm that consistently makes money. So, you can say, “Why is this person trading with me? And why is it that I think I'm going to do better on the trade than this person, this company that is quite profitable by trading with people like me?” And that can be a tough question to answer. I'm not saying there's never a good answer. But more often than not, the answer is, realistically they'll probably do better on this trade than I will.

When you pull out your phone, and you place a trade in an environment that almost looks like a simple game, there's more of a sense of it's me against the game. And you think, “I've beaten games before. If I keep practicing, I'll get better at this.” It feels more as if you are competing, not with a person, but with a game, with something that you can perhaps learn to outsmart or outplay. And that's not the case. There are a lot of little games you can play on your phone. And as you get better and play more and more, you're likely to get better and better and start winning more. When you're placing trades in the market, you are consistently trading with financial professionals, usually large trading firms. And in most cases, the retail investor is going to do less well in the long run.

And I am not at all trying to say that retail investors always lose. That's not true. And I'm sure if I said such a thing, I'd get a lot of email telling me I was wrong. But I also know that, on average, at least historically, they have not benefited from active trading. And I've analyzed datasets at different times, in different countries. I've read many studies written by colleagues who have analyzed the trading of retail investors at different times and in different countries. This is a consistent finding.

Benz: I wanted to follow up on that, because it seems like the only really notable advantage that the small individual investor has is a long holding period or if they can be patient, that's maybe an edge that they have versus professional investors who might have outside pressures to perform a certain way. How come so few individual investors get that memo that if you want to buy individual stocks, you should buy and hold and hold and hold?

Odean: I don't know how many do because we don't talk about them as much. So, undoubtedly, there are many individual investors who are buying and holding mutual funds and there are probably many who are buying and holding individual securities. My dad died I think it was about half a dozen years or so ago. Fortunately for me, my brother dealt with most of the estate issues, but he found investments in individual stocks that my dad bought in the '60s. So, he was apparently a buy-and-hold investor of individual stocks. I think there are a lot of people out there who are patient and sit on portfolios, not necessarily mutual funds. But we don't talk about them as much in podcasts because they're not doing much or you can say what they're doing is a good idea, but there's not much to say like, “good strategy.”

Robinhood is new. There are more than 20 million people who've signed up with Robinhood. And many of them in the last few years, we've observed a surge in retail trading in the last couple of years. That surge in retail trading quite likely has contributed to higher market prices. So, it's newer, it's more exciting. And there's a lot of people doing it. But I suspect that there are also a lot of people out there who are taking a more patient approach.

Ptak: You mentioned a few of the things that seem unique about this moment that we're in: simplification of interfaces, gamification of the experience, another, I suppose you could argue, is herding. We've seen this with subreddits, and meme stocks, crypto NFT, you name it. But I think you've described this sort of thing as a herding effect, and in particular, I think you've observed this at Robinhood. And you've noted that herding, these periods tend to be associated with large, negative abnormal returns subsequently. Can you talk about what herding is, as you've defined it, and also the return pattern that seems to follow from it?

Ptak: There is an interesting change. It's been true for a long time that investors--not only individual investors, but to a larger extent individual investors--herd in the sense that they tend to buy the same stocks as each other at about the same time. I've written about this in the past, well over 10 years ago, probably 15 years ago, Ning Zhu, Brad Barber, and I wrote a paper looking at this. And it was certainly true in the dot-com bubble that you saw the individual investors, many of them buying the same stocks at about the same time. But there is a fundamental change.

So back in the early '90s, or the '80s, or the '70s, or the '60s, it was very difficult to observe, to know what other investors were doing directly. You could observe that a stock had gone up, and you buy it because it went up, and then other people buy it because it went up. And you end up with herding because individual investors were more inclined to chase returns than retail investors. Or investors could all read about the same stock and decide, “Wow, I just read about pets.com. That sounds like a fabulous idea. I think I'll buy it.” And other investors read the same article and buy the same stock. And so, you got herding, because retail investors were responding to the same signal.

What's changed is now with Reddit, subreddits, like WallStreetBets, you can see pretty much in real time, what other investors are thinking, what they're at least writing. People are saying, “I'm buying this, this is what I'm buying at.” So that the term “herding” comes from herds, like herds of buffalo, and where all the animals are running the same direction. And to some extent, they are following a few leaders. And if those few leaders move, they all change their direction at the same same time.

I think today because of social media, the potential for herding to be like the buffalo is more there. It's the idea that I'm doing something because I saw someone else like me do it. As opposed to, “I'm doing something because I read an article and thought, oh, I want to buy this,” and this other person read the same article. Now I'm reacting to this other person's comments, what this other person says he or she is doing. And that's both intensified the amount of herding and, again by herding I mean a lot of retail traders buying or selling, but usually the herding is more intense on the buy side, the same stock, at the same time. It's intensified it and it's also shortened the time frame.

If you were reacting, buying stocks because they went up, then at least some investors would buy a stock the day you'd read that the price had gone up, you buy it the next day, that pushes the price a little higher, other people buy it the day after that. Or if there's an article that you all read in the newspaper, there's still a little bit of a lag in how long the period over which this herding takes place. Now it can be extremely fast; it can be minutes or hours. And so, when we looked at trading, and looked at the reactions of Robinhood investors buying a stock for the first time, we found days where the number of Robinhood investors that own a stock went up many times in that same day. And generally what we found was that such events had a pattern where the stock price went up a lot, there was a great deal of buying near the peak, and then the stock price went down, but not down to where it had begun.

So, to be clear it would start low, go very high, and then come back down. As best we could estimate, on average, these investors were losing money because so many of them, in this particular trade--I'm not talking about the rest of their portfolio--but in this particular trade over a short horizon, because so many of them were buying near the peak. Undoubtedly, the people who got in on this herding event early, many of them would have made money. To us it was sort of like, there's a party going on. But what if you were one of the people who about midnight or 1 a.m., you hear a rumor that there's a party over on Fourth Street. And you get to the party just as you see people are starting to leave, before the police show up to tell everyone to turn the music down. You're a late arrival, and you don't get to really enjoy the party. I think that's somewhat analogous to what happens in these herding events, that the people who arrive at the party late end up not having as much fun.

Benz: I wanted to ask about your famous research about gender differences in investing. You and Brad Barber collaborated on this research, it gets cited all the time, about how men and women invest and the basic takeaway, and correct me if I'm wrong, but it's that men are overconfident some of the time and that leads to more frequent trading activity that hurts their results relative to women who are often more patient. So sometimes I hear that's shorthanded as “women are better investors.” Is that too simplistic in your view?

Odean: It's too simplistic in my view. So, we wrote that paper actually to test a hypothesis. I had written a theoretical paper that said that when investors are overconfident, when they think they know more than they do, when they think they're better investors than they are-- those investors will trade more, and that trading will hurt their return. And based on reading the psychology literature, as well as some anecdotal observation, we realized that, on average, men tend to be more overconfident in areas such as finance, mathematical sciences, things that in our culture are perceived to be in the male domain, quite likely incorrectly. In my opinion incorrectly, but that's where boys may have grown up being told boys are good at this, and girls grew up being told boys are good at this. And the boys became overconfident. There are various reasons why men might be more overconfident, but in any case, there was a literature that suggested in areas such as finance men were overconfident.

Brad, and I thought, “Well, if that's true, then what we would expect is that men will trade more actively, if the theory is right, and that that trading will hurt their returns.” And that's what we found. Men traded much more actively than women in our study. And that trading reduced the returns. Basically, we took a look at how people did in their portfolio compared to how they would have done without a buy-and-hold approach for each year. So, we took a look at what someone was holding in their portfolio beginning of the year and compared what that portfolio would have earned for the year to what the investor actually earned.

And in that study, we had commissions. We knew what the commissions were, so we deducted commissions from the returns. And we did find that men underperformed women by about one percentage point more a year compared to that buy-and-hold approach. But women were also underperforming compared to buy and hold. So, I wouldn't get too excited. What we found was that women, to the extent they did better, it's because they did less, if that makes sense. They were a little less active in their trading. That's a good thing. But we did not find anything that would say, women were better stock-pickers than men. What we basically said was that in our sample, neither men nor women were particularly good, but men did it more often.

Ptak: The financial-services industry, as we know, isn't very diverse. It has a smaller percentage of women and people of color than other industries. You've contributed research looking at women CFA charterholders, and found that role models, especially parents, were important to their career paths. Can you talk about that?

Odean: Many people have asked the question, why aren't there more women in the financial-services industry? And a number of explanations have been proposed. And actually, as far as I can tell, almost all of them are right. And most of them, these are not mutually exclusive. So, the role model one, there's a good deal of evidence, not from our research, but from people who work more broadly in this area, that girls are likely to grow up and enter career paths for which they've observed women successfully in that career path previously. If you grew up and most of the people that you saw in the financial-services industry were men, it's less likely that a young woman will choose that.

There was a fascinating study done in India, where different villages were required to have a woman as the head of, I think it was the city council or the equivalent, but it was a randomized, how this was applied. And the researchers what they did is they interviewed parents of girls in these villages and asked them to list careers that they might see their daughters going into. And in the villages where there had been a woman as the head of the city council, politics was more likely to show up as one of the things that the parents said, “I could see my daughter going into politics.” And almost certainly the same thing was true for the girls. So, role models make a difference.

Other things matter, though, too. Claudia Goldin at Harvard talks about the flexibility of a job, time flexibility. And it's well known that women, on average, end up with far more outside-of-work responsibilities; they're more likely to end up with childcare responsibilities, they're more likely to end up being the spouse that helps take care of elderly relatives and parents. Having some flexibility in their job can be much more important to women. And a great deal of the financial-services industry is not particularly flexible. A young woman who is a student of mine, she is going to take a job with Goldman Sachs, starting when she graduates in May. And so that's great, there'll be another woman in that industry.

But we were talking and I was asking her about her job. And she said she'd been told that she was expected to be at work at six and to stay at work till at least six. Now, that's not very flexible in terms of time. So, what Claudia Goldin points out is that women will often choose an industry that has more flexibility. One of the examples she uses is pharmacist. If you go become a pharmacist, there's two things: one, you can get jobs that have flexible schedules while you're working; also, if you happen to take time away from work and come back, like you take some months off, or a year off and then come back to work, you haven't ruined your career. If you are an analyst who's hoping to someday run a mutual fund, you probably have to work really, really long hours early in your career. You can't take a year off.

It's an industry where there's a lack of flexibility, and also where a lot of the rewards are to the people who make it to the top. So, if you end up being an analyst all of your life, you will probably make a lot less money than if you are able to parlay that into running a large mutual fund. The payoffs are large, they come later, and they come to people who make large time sacrifices early. So that's one problem. And then role models are another. And then another is, there's at least some evidence, and I've been working on another paper that looks at this: that values may matter to some extent that if you look across the world at surveys of what people value, not value, women, on average, tend to hold more pro-social values than men do within country. And the financial-services industry, a lot of it, I don't think is perceived as an industry that is so dedicated to doing good in the world. And I'm not saying that it doesn't ever do good, but it's not the same as say, becoming a doctor, where you can say I'm going into medicine, I'm going into a field that saves lives and makes people healthy. That may be in part why also I think a lot of women who are attracted and are coming into financial services that you see probably more of an increase of women in financial advising than in jobs like being an analyst or an investment banker.

So, there are a lot of reasons. Role models are one, time flexibility, having industry that makes it possible for someone to have both a career and a life in their 20s. And then a focus on doing some good. And just one last thing I should say that I think the whole financial-services industry is starting to recognize the responsibility for doing more good in the world. And thus, there's a big emphasis on things like ESG investing, socially responsible investing. That is a good thing, and it probably will also help attract more women into the industry.

Benz: You studied with Daniel Kahneman, and he encouraged you to get your Ph.D. in finance. As you think about how the field of behavioral finance has evolved over your career, what are the key areas that you believe deserve more attention than they've gotten to date?

Odean: That's a tough question. When I entered the Ph.D. program, I went and talked to David Modest, who was one of the faculty here at UC Berkeley. And one of the things I asked him was, what do you think the next important thing is in finance? And he smiled and said, “If I knew what that was, I'd be working on it.”

Benz: Same with you?

Odean: That's same with me. What I'm happy about is the two big changes in finance since Danny Kahneman encouraged me to get a Ph.D. in finance instead of psychology. And both are somewhat related to what I work on. One is behavioral finance. Behavioral finance is essentially recognition that people are not always completely rational when they make decisions about money. And that these deviations from being completely rational tend to be systematic and sometimes very relevant to what happens in markets and in finance. When I was entering finance, almost all the theories assumed that economic agents were extremely rational and that those who weren't, didn't really matter; they added little noise to the system. And that was it. And now I think, generally speaking, most economists would readily say, “Well that's not how I see the world.”

The rise of interest in behavioral finance has been great. And the other part is what's called household finance. I was shocked, I was really surprised when I started taking finance classes, that everything I learned--not everything, but most of the things I learned--were mostly targeted toward being useful to institutional investors. A lot of really good research, lots of research on portfolio theory, options theory, corporate finance, but there was almost nothing said about households. And even when I started doing research on individual investors, there was very little research on individual investors; there was quite a bit of research about institutional investors. And there's now a field of household finance, and not just around investing. Yes, it looks at investing, but it looks at credit markets’ use, insurance, budgeting, taxes, all sorts of things. There's an area of finance now that is interested in the welfare of individuals and the welfare of households. I think that's a fabulous thing. What the next changes are, I just don't know. I wish I did.

Benz: Well, Dr. Odean, this has been such a fascinating conversation. Thank you so much for taking the time to be with us today.

Odean: Thank you for inviting me. It's really a pleasure. Thanks, Christine. Thanks, Jeff.

Ptak: Thank you so much.

Benz: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts.

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Ptak: And @Syouth1, which is, S-Y-O-U-T-H and the number 1.

Benz: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.

Finally, we'd love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.

(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. Morningstar and its affiliates are not affiliated with this guest or his or her business affiliates unless otherwise stated. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Jeff Ptak is an employee of Morningstar Research Services LLC. Morningstar Research Services is a subsidiary of Morningstar, Inc. and is registered with and governed by the U.S. Securities and Exchange Commission. Morningstar Research Services shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis, or opinions, or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.)