IN FOCUS6-8 min read

The bias of UK investors that could lead to lower returns

A major new test has found UK investors are most likely to suffer from ambiguity aversion, a bias that could potentially mean them taking fewer investment risks.



David Brett
Multi-media Editor

Whether we realise it or not, as investors we all have behavioural biases that can affect our investment decisions. By understanding these traits, we might be able to improve our outcomes.

More than 23,000 people in the UK have now taken the Schroders investIQ test, which was designed to help investors understand such behavioural biases.

The test found that UK investors on average have a bias towards ambiguity aversion.

Investors with ambiguity aversion tend to choose investments that will provide them with more of a known possible outcome over ones that are more uncertain. This could lead to investors taking less risk, which might lead to lower potential returns. However, taking on more risk is subject to greater losses.

The bias that investors in the UK are least likely to suffer from on average is the herd influence. This relates to the assumption that the herd collectively knows something we don’t. As a result we might irrationally follow others; ignoring the information we have, and what’s right for us as individuals.

Average biases among UK investors


Source: Schroders investIQ. July 2019.

Are women too optimistic?

There were stark differences between men and women when it came to investment biases.

As the chart below shows, men (blue coloured line) are most likely to have ambiguity aversion. Women (orange coloured line) are most likely to have a bias towards avoiding losses.

Investors with loss aversion bias tend to fell losses more sharply than the equivalent gains. This can impact our ability to make rational decisions and we end up trying to avoid losses at all costs rather than logically considering the alternatives.

When it comes to investing, loss aversion bias may lead us to hold onto falling investments too long in fear of cashing in a loss. Similarly, we might sell rising investments too soon for fear of losing the gains.

The difference in biases between men and women


Source: Schroders investIQ. July 2019.

A tendency to follow the herd

The biggest contrast between the sexes in the UK is that men are more likely to be over confident, while women have a higher tendency to follow the herd.

Overconfidence is the tendency to believe in yourself without considering factors beyond your control. This may lead you to overestimate your ability to make rational investment decisions.

As a result you might think investment markets cannot surprise you, you might take on more risk than necessary, and move investments around too frequently.

Women are far more likely than men to be influenced by the thoughts and behaviour of those around them - the ‘herd’.

Younger women are far more likely than younger men to want to follow the herd.

As the chart below shows, millennial women (aged 18-34) are 13% more likely than the average to have this trait, compared with 6% for men in the same age group.

Herd bias decreases by age for both genders. By the time men and women reach the age of 65 and over they are respectively 9% and 11% less likely to have this trait.

How herd biases differs between men and women


Source: Schroders investIQ. July 2019.

Claire Walsh, Personal Finance Director, said: “We often hear that women are not engaged in their finances; they are less likely than men to invest or to contribute to pensions and when they do, they put in less.

“Discovering that women are more prone to the herd bias rang true to me. Whilst herd bias can be responsible for driving classic investment mistakes – buying high and selling low, or chasing investment bubbles like bitcoin, it may also be driving how women do (or don’t) engage with their finances.

“Young women want to feel like they are behaving in a similar way to their peers – they are much less likely than men to go off and research things themselves.

“Most young women don’t invest and so if they are talking to friends they are likely to continue to replicate that behaviour – keeping most of their money in cash.

“Over the longer term, not taking sufficient risk with their money means that women could be missing out.

“This is particularly impactful when it comes to pension savings, where women are substantially poorer than men at retirement.”

For instance, women in their 60s have an average of £51,100 in their private pension pots while men have £156,500, according to retirement research body the Pensions Policy Institute (PPI).

Men become more anxious with age

Men are more anxious than women when it comes to investing, but that anxiety only accelerates in later years, according to the investIQ test.

If you are prone to anxiety bias you tend to be easily influenced by the short-term ups and downs of the market and feel compelled to take action. This may lead to irrational investment decisions that undermine your long-term financial objectives.

As the chart below shows, men aged 50 and over exhibit the anxiety bias more than women. Between 50 and 65 men are 2% more likely than average to show the trait compared with women who are 7% less likely.

When they are 65 and over men are 3% more likely to be anxious compared with 2% for women.

That is in stark contrast to millennial men who are 5% less likely to suffer anxiety compared with 9% for women.

The changes in the anxiety bias between men and women


Source: Schroders investIQ. July 2019.

“Whilst women are more anxious when they are younger than men, this flips as they get older, with baby boomer men more anxious than women of the same age,” Walsh said.

“This surprised me. In general, my feeling from dealing with financial advice clients who are approaching retirement is that both men and women tend to get anxious as they get older.

“My hypothesis on the findings would be that women are in general worriers and when they are young there is more to worry about – getting a career, getting on the housing ladder, looking after children.

“Men tend to take more risks when they are younger, but as they become more mature their awareness of the important things in life becomes more prevalent.

“Older women have less to worry about once their children have flown the nest and this is also reflected by the fact they are more confident.”



David Brett
Multi-media Editor


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