Gender differences in financial risk tolerance.pdf
Gender differences in financial risk tolerance
Patti J. Fisher a,⇑, Rui Yao
aVirginia Tech, United States
University of Missouri, United States
a r t i c l e i n f o
Article history:
Received 14 June 2016
Received in revised form 10 March 2017
Accepted 10 March 2017
Available online 16 March 2017
JEL classification:
D10
PsycINFO classification:
3920
2970
Keywords:
Risk tolerance
Gender differences
Household behavio
Personal finance
a b s t r a c t
The purpose of this research is to explore gender differences in financial risk tolerance
using a large, nationally representative dataset, the Survey of Consumer Finances. The
impact of the explanatory variables in the model is allowed to differ between men and
women to decompose gender differences in financial risk tolerance. The results indicate
that gender differences in financial risk tolerance are explained by gender differences in
the individual determinants of financial risk tolerance, and that the disparity does not
esult from gender in and of itself. The individual variables that moderate the relationship
etween gender and high risk tolerance are income uncertainty and net worth, with
income uncertainty moderating the relationship between gender and some risk tolerance.
Financial fiduciaries should understand the differences in income uncertainty and net
worth between men and women and how those differences relate to risk tolerance.
! 2017 Published by Elsevier B.V.
1. Introduction
Risk taking is a fundamental dimension that economists investigate to explain individual differences in behavior (Bucciol
& Za
i, XXXXXXXXXXRisk tolerance, which indicates the degree to which a person is willing to take risks, plays an important role in
household portfolio decisions (Sung & Hanna, 1996) and has implications for both individuals and financial service providers
(Hallahan, Faff, & McKenzie, XXXXXXXXXXFinancial risk tolerance is the level of discomfort that an individual is willing to accept
while risking cu
ent wealth for future growth (Gibson, Michayluk, & Van de Venter, 2013).
In efficient markets, investors can expect a higher return for a higher level of risk. As such, investors with higher levels of
isk tolerance tend to invest in assets with greater levels of risk, such as stocks, to obtain greater returns in the long term
(Yao, Hanna, & Lindamood, 2004) and build greater wealth (Neelakantan, XXXXXXXXXXAn investor with lower risk tolerance
equires added compensation to accept uncertainty when faced with an investment that has a variable payout (Hanna,
Waller, & Finke, XXXXXXXXXXThus, investors with low levels of risk tolerance may have greater difficulty reaching their financial
goals and building adequate retirement wealth because they are unlikely to invest in stocks (Yao et al., 2004).
http:
dx.doi.org/10.1016/j.joep XXXXXXXXXX
XXXXXXXXXX/! 2017 Published by Elsevier B.V.
⇑ Co
esponding author.
E-mail address: XXXXXXXXXX (P.J. Fisher).
Journal of Economic Psychology XXXXXXXXXX–202
Contents lists available at ScienceDirect
Journal of Economic Psychology
journal homepage: www.elsevier .com/ locate/ joep
Understanding investors’ financial risk tolerance is important for financial service providers in a post global financial cri-
sis environment that includes a recent fiduciary rule issued by the U.S. Department of Labor (United States Department of
Labor (DOL), 2016, April). Previously, sales-oriented advisors were held to a suitability standard. With this change in regu-
lations, more advisors are being held to a higher fiduciary standard of care for a
oader range of advisory services. This
means that the personal recommendations provided must be in the best interest of the client, and adequate understanding
of investors’ risk tolerance is a necessary condition to meet this requirement. However, research shows that financial advi-
sors may not fully understand the financial risk tolerance of women, underestimating women’s risk tolerance (Roszkowski &
Grable, XXXXXXXXXXThere is a need for advisors to better understand and assess women’s risk tolerance through reliable and valid
methods in order to provide recommendations in the best interest of the client.
Ho, Milevsky, and Robinson XXXXXXXXXXstated that women should hold riskier portfolios than men because of their longer life
expectancies, assuming otherwise identical preferences. However, researchers have found generally that women have lowe
financial risk tolerance and invest financial resources more conservatively than do men (Bajtelsmit, Bernasek, &
Jianakopolos, 1996; Em
ey & Fox, 1997; Faff, Mulino, & Chai, 2008; Grable, McGill, & Britt, 2009; Hallahan et al., 2004;
Hinz, McCarthy, & Turner, 1997; Neelakantan, XXXXXXXXXXAmong common stock investors, Ba
er and Odean XXXXXXXXXXfound that
men are overconfident and trade more frequently than women, thereby reducing their returns relative to those of women.
Lemaster and Strough XXXXXXXXXXinvestigated gender differences in risk tolerance, and found that gender identification, o
identifying as one’s biological sex and viewing it as a positive part of the self, was important in explaining the differences.
Using experimental methods, D’Acunto XXXXXXXXXXalso found that gender identity helped explain the gender differences in risk
attitudes and beliefs. Gender is the social distinction between men and women, while sex is the biological difference
(Helgeson, XXXXXXXXXXIn the cu
ent study, we use the respondent’s sex, male or female, as a measure of gender, as no additional
measures in the data set allowed us to distinguish gender or gender identity.
Gender differences in risk tolerance have critical implications for women. Variations in risk preferences between men and
women may lead to differences in portfolio allocations that result in wealth inequality (Yao, Sharpe, & Wang, XXXXXXXXXXFo
example, women with lower levels of risk tolerance may not be prepared adequately for retirement given their longevity
and the individual responsibility placed on retirement saving today. Financial advisers also have reported that women hold
portfolios that are more conservative and yield lower returns (Wang, XXXXXXXXXXConservative investments can lead to lowe
levels of wealth accumulation that contribute to the gender gap in wealth.
Althoughmany researchers have investigated whether gender is related to financial risk tolerance (e.g., Cupples, Rasure, &
Grable, 2013; Sung & Hanna, 1996; Yao et al., 2011), the contribution of this study is the identification of factors that con-
tribute to gender differences in risk tolerance. The purpose of this study was to identify the factors related to risk tolerance
among men and women using a decomposition technique. This will help us understand better whether the gender differ-
ences observed are due to gender itself, or because the factors related to risk tolerance affect men and women differently
and thus lead to differences in their risk tolerance. The decomposition technique allows us to determine the way in which
these factors affect men and women independently, and provides information about which variables differ significantly
etween men and women in terms of their relationship to risk tolerance. Existing research has shown that a number of
demographic, socioeconomic, and attitudinal factors affect risk tolerance, and it is necessary to examine these relationships
in more detail (Sung & Hanna, 1996).
1.1. Review of literature
Early research in psychology often presumed that risk attitudes, or a person’s place on the continuum from risk averse to
isk seeking, is a personality trait (Plax & Rosenfeld, XXXXXXXXXXRisk tolerance levels were a function of the specific task, decision
frames, and information processing strategies (Schoemaker, 1990; Weber & Milliman, XXXXXXXXXXIndividual financial risk toler-
ance was assumed to be a main determinant of asset allocation choices, security choices, and goal planning strategies (Grable
& Lytton, XXXXXXXXXXVan de Venter, Michayluk, and Davey XXXXXXXXXXfound that financial risk tolerance is relatively stable over time.
Today, the assessment of financial risk tolerance as an attitudinal component of the financial decision-making process is a
factor of interest to researchers, practitioners, and policymakers (Gilliam, Chatterjee, & Grable, 2010).
1.1.1. Gender and risk tolerance
Self-reported gender differences in risk tolerance have been examined widely. Empirical findings agree generally that
women are, on average, less risk tolerant in their financial decisions than men (Byrnes, Miller, & Schafer, 1999; Gibson
et al., 2013; Grable & Lytton, 2001; Hawley & Fujii, 1993; Jianakoplos & Bernasek, 1998; Olsen & Cox, 2001; Palsson,
1996). Hallahan et al XXXXXXXXXXfound that gender was a significant determinant of risk tolerance, such that women were sig-
nificantly more risk averse. Cupples et al XXXXXXXXXXfound that women exhibit a risk-averse profile, with education serving as a
mediator and reducing the gender difference in risk tolerance.
Several researchers have explored the link between marital status, gender, and risk tolerance. Sung and Hanna (1996)
showed that single women are less risk tolerant than are single men or ma
ied couples. Similarly, Sunden and Su
ette
(1998) found single women to be less risk tolerant than are single men. The results of Yao et al.’s XXXXXXXXXXstudy showed that
oth ma
ied and unma
ied females have lower risk tolerance than do ma
ied men, while unma
ied males exhibit the
greatest risk tolerance. Yao and Hanna XXXXXXXXXXfound that risk tolerance was highest amongma
ied men, followed by unmar-
ied men, unma
ied women, and finally, ma
ied women. Yao et al XXXXXXXXXXfound a negative relationship between being an
192 P.J. Fisher, R. Yao / Journal of Economic Psychology XXXXXXXXXX–202
unma
ied female and risk tolerance. However, in contrast to the findings above, Grable and Joo XXXXXXXXXXand Hanna, Gutter,
and Fan XXXXXXXXXXdid not find that gender was a significant predictor of financial risk tolerance.
Researchers also have examined gender differences in financial risk-taking behavior. Xiao XXXXXXXXXXfound that women were
less likely than men to hold stocks and more likely to hold certificates of deposit in their portfolios. Dwyer, Gilkenson, and
List’s XXXXXXXXXXstudy showed that women take fewer risks in mutual fund investment decisions than do men. Bajtelsmit et al.
(1996) examined gender differences in defined contribution pension allocations and found that women invested their hold-
ings more conservatively. Generally, research shows that women are less risk tolerant than men; however, there have been
exceptions. For example, Zhong and Xiao XXXXXXXXXXdid not find a gender difference in the dollar holdings of stocks, and Arano,
Parker, and Te
y XXXXXXXXXXfound no gender difference in the proportion of stocks held in retirement accounts among a group of
university faculty in Kansas.
Using data from the Health and Retirement Study (HRS), which focuses on older Americans, Neelakantan XXXXXXXXXXshowed
that gender differences in risk tolerance accounted for approximately 10% of the gender difference in accumulated wealth.
Cupples et al XXXXXXXXXXfound that the total effect of gender on risk tolerance was reduced when education was included as a
mediator. These results indicate that a number of other factors mediate the gender difference in financial risk tolerance. Lim-
ited research has investigated whether the gender difference in risk tolerance is due to gender itself, or due