Universiteit van Amsterdam
Faculteit Economie en Bedrijfskunde Bachelor Scriptie Economie
Behavioral Economics
Onderzoek uitgevoerd door: Rebelle Smit Scriptiebegeleider: Matthias Weber Juli 2014
Abstract
Several studies have shown that women are more risk averse than men in financial decision making. However, new studies show that these evidence for gender differences are not that strong as previous studies suggest. This paper surveys the existing literature regarding gender in financial decision making. It discusses gender differences along five topics (general financial risk taking and four sub-topics). This literature review concludes that although there are studies that find gender differences, these gender differences are not that obvious as they suggest and the evidence for these gender differences in financial risk taking are not that strong as was observed in the first studies about this subject.
2014
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Financial Decision Making: Are Women Really More
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1. Introduction
The number of women working in the financial sector increases slightly over time, which arises the interest in gender differences in financial decision-making. However, men are by far the majority ruling this sector and most people argue that this is because of the risk that comes with a career in this sector. Women are seen as more risk-averse than men and therefore are less willing to take a career in this risky sector. Despite recent contradictory evidence, stereotypical belief about gender differences prevail. A consequence of this stereotyping is statistical discrimination which diminishes the success of women in financial and labor markets. The perception that female managers are less risk-prone than men has been put forward as a major cause of “glass ceilings” in corporate promotion ladders (Johnson and Powell, 1994).
When the crisis happened in 2008, the risk taking of men were being questioned. Quotes as “credit default swap cowboys” (Mortgenson, 2008) were being used and Wall Street was being seen as the Wild West with “too much testosterone” (Syed, 2008). They argue that there are too much men working in the financial sector. Men have a higher risk tolerance than women and men are also more willing to compete, which drives the accepted risk level even higher. Women are more prudent in their actions than men. They think through their actions and their consequences and therefore take less risk than do men (Levin et al., 1988). A financial services sector chief executive officer (CEO) says, “women [...] have a greater desire to build firm foundations that will endure” (de Vita, 2008). Men primarily focus on the achievement of gains because of their agentic orientation and independent self-view, whereas women primarily focus on the avoidance of losses because of their communion orientation and interdependent self-view (He, Inman and Mittal, 2007, p. 415). Taken this in consideration, women may be wrongly stereotyped, making the “glass ceilings” unjustified.
This paper reviews the literature so far about this subject and will answer the central question: Are women really more risk-averse than men when it comes to financial decision making? The first section is about financial decision making in general and then four sub-topics of financial decision making (investment, gambling, management and pensions respectively) will be reviewed. After that the consequences of the level of risk-aversion and the stereotyping of women will be discussed.
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2. General financial risk-aversion:
This section discusses the empirical work so far about general financial risk-taking. Men and women differ in a lot of ways, but the most important factors that differs the sexes are biological ones, such as the level of testosterone in our body. The level of testosterone may explain gender differences in financial risk-aversion and therefore also in their career
choices. Sapienza et al. did an laboratory experiment with 2000 MBA students and find that men exhibited significantly lower risk-aversion than women (P < 0.01) and also that men had significantly higher levels of salivary testosterone than women (P < 0.01) (2009, p. 3). They also find a correlation between high testosterone levels and career choices in the financial sector. This means that persons with a high level of testosterone in their body and therefore a lower risk-aversion were more likely to choose a career in the financial sector. Besides the level of testosterone in our body, there may be more factors that determine the choice for a risky financial career, such as the willingness to compete.
Niederle and Vesterlund find that whereas men prefer to be compensated under a tournament scheme, women prefer a noncompetitive piece-rate scheme (2011, p. 625). Perhaps the most robust explanations for this difference are that men tend to be more confident in their abilities than women and that they differ in their attitudes toward competition. Whereas men are eager to compete, women appear to shy away from
competitions (Niederle and Vesterlund, 2011, p. 625). Also Bönte et al., who did an empirical research with date from 36 countries, find that women tend to shy away from the challenge of competition and their results suggest that this may have negative effects on female entrepreneurship (2011, p. 28).
Croson and Gneezy (2009) looked at the differences in risk-aversion and the willingness to compete from another perspective. They looked at the differences in emotional reactions between men and women by means of theory, laboratory and field experiments. Men and women differ in their emotional reaction to uncertain situations and this differential emotional reaction results in differences in risk taking (Croson and Gneezy, 2009, p. 454). However, they find that there are more factors that cause differences in risk preferences between men and women, like the level of confidence of men and women. They find that male subjects are more confident than female subjects, which is also found by Barber and Odean (2001). Men also tend to view risky situations as challenges, as opposed to threats, which leads to increased risk tolerance (Croson and Gneezy, 2009, p. 454). And in
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line with the previous studies, they also find that women are less willing to compete than men. However, they state that women who does not shy away from competition and are willing to compete, achieve the same results as men in these competitive settings.
Though, there are some contradicting empirical papers, such as the discussion paper from De Paola et al. (2013). They did and field experiment involving 720 Italian
undergraduate students, which were requested to attempt a midterm exam which could rewarded a bonus points for their final grade, but only if they answered 33% of the answers correctly. However, unlike the previous papers conclusions, they find that women are just as likely as men to take this test, which means that they do not shy away from competition. So, De Paola et al. could not find evidence for gender differences in the willingness to compete, in fact they even find that females perform better under competition than without
competition. In their research, they controlled for psychological differences, so the conclusion that there are differences in the willingness to compete are presumably influenced by other characteristics, such as confidence or risk-aversion (2013, p. 18).
Besides confidence and willingness to compete, there may be other factors that could explain the gender differences in risk preferences between men and women. He et al. (2007) argue that issue capability might be a factor that could explain these differences. Issue capability: the extend to which decision makers perceive that they have the resources or skills to resolve an issue (Mittal, Ross and Tsiros (2002) p.455). He et al. used the data from the game show Jeopardy! to examine whether there are differences in risk taking between men and women. They find that issue capability is positively correlated with risk taking (P < 0,05). Which means that individuals with high issue capability tend to take more risk than those with low issue capability. They find that men primarily focus on the
achievement of gains because of their agentic orientation and independent self-view, whereas women primarily focus on the avoidance of losses because of their communion orientation and interdependent self-view (He, Inman and Mittal, 2007, p. 415).
But what if men and women have the same risk-aversion and only differ in their reaction to salience? Booth and Nolen (2012) used the BGS Salience Model and 493 first-year students to answer this question and to explain gender differences in risk preferences. If there is not a gender difference in risk-aversion, but the sexes are affected in a different way by salience, men may be observed to display less risk-aversion depending on what payoff is made salient (Booth and Nolen, 2012, p. 517). And this is exactly what they
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conclude. In their study they find that chance of affecting by salience is higher for men than for women. Men are significantly more likely than women to switch from a certain to a risky choice once the upside of winning is made salient, even though the expected value of the choice remains the same (Booth and Nolen, 2012, p. 520).
The literature discussed so far in this paper was based on data from household or students with only a little knowledge of economics and finance. Casanovas and Merigó (2012) used a database of 677 university professors form five different departments. Four of them were randomly chosen, but the other one was the department of economics business which is chosen to distinction between individuals with and without financial specialisation. They find that women without a financial academic specialisation are more risk loving than those who have a financial academic specialisation. Men show the opposite pattern
(Casanovas and Merigó, 2012, p. 9687). They also tested for influences of other socio-demographic variables such as age, education and number of children, but they could not find any differences in risk preferences.
Another socio-demographic variable is ethnicity, which was not include by the research of Casanovas and Merigó, but which is the topic of the paper of Zinkhan and Karande (1991). Using the response of 110 American and 102 Spanish MBA students, they test whether there are cultural differences in the degree of risk-aversion of men and
women. They find that Spanish subjects showed greater risk-taking behavior than American subjects. Men in the American sample showed more risk-taking behavior than women. Similar results emerged in the Spanish sample in which men showed more risk-taking
behavior than women (Zinkhan and Karande, 1991, p. 742). So, in both countries women are more risk-averse.
The conclusion of this section is that, although there are some contradicting papers, the majority finds that women are less willing to compete, have less confidence than men and that there are gender differences in the level of risk-aversion even when they controlled for socio-demographic variables such as education, age, children and ethnicity.
3. Investment:
Theory makes clear that risk and returns are correlated. A more risky asset should be compensated with a higher return. The more risk-averse an individual is, the less he/she is
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willing to invest in high risk assets. This could have a substantial impact on their portfolio returns. As was pointed out in the introduction, the main conclusion in the literature is that women are more risk-averse than men in financial decision making. Does this also hold for investment decisions? Because if this is true, this can lead to lower returns and therefore lower wealth of women comparing to men. This could also have effects on their retirement income, which will be discussed later.
Jianakoplos and Bernasek (1998) were the first who invested gender differences in financial decision making. They state that according to the expected utility theory, the dollar amount and the proportion of risky assets in an investor’s portfolio are assumed to be a function of the person’s wealth and degree of risk-aversion. They did an regression, which controlled for other economic and demographic variables which may influence portfolio allocation, such as race, age and education. They find that women are more risk-averse than men regarding financial decision making, based on their survey responses. However, their database was single men and women only, so it may not be true for all men and women. The conclusion based on this study should not be generalized. Also, the results may not apply to other cultures, because the sample was U.S. based.
There are several articles which almost used the same method to test for gender differences in financial decision making. Dreber et al. (2010), Dreber and Hoffman (2007), Charness and Gneezy (2010), Charness and Gneezy (2004) all did an field experiment with an investment question. They asked the decision maker how much of his/her capital he/she wants to invest. Some of them were designed to test for gender differences and other just found gender differences without looking for them. But they all conclude that women are more risk-averse than men with respect to investment decision.
Barber and Odean (2001) researched gender differences in investment decisions from another point of view. They looked at the confidence levels of men and women, through data of common stock investments of about 37500 households for which the gender who started the account was known. They compared the average returns of these households and find that overconfident investors trade excessively and since men are more overconfident than women, men should trade more excessively than women (Barber and Odean, 2001, p. 261). Since they trade more than they would if they invest rationally, their returns will be lower due to their overconfidence. They find that the average turnover rate of men is almost one and a half times the turnover rate of women, which lead to a decrease
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of 0,94 percentage point of their average yearly returns compared to women. However, it should be noticed that this decrease in the average returns is due to the overconfidence and excessively trading, not because their selection of securities is worse.
The greater risk-aversion of women can be caused by uncertainty. Greater uncertainty can lead to a higher risk-aversion. To understand the gender differences in financial decision making, Olsen and Cox (2001) surveyed professional investors to see whether women with a financial specialisation are also more risk-averse than men. They find that women financial professionals place greater weight on downside or loss potential than men in an investment setting. Also, women appear to be more sensitive to the ambiguity or uncertainty associated with investment in financial assets (Olsen and Cox, 2001, p.34). So, women want to have less risk, or in other words, to have more security when it comes to investment decisions. They are more risk-averse than men with respect to investment decisions.
But is uncertainty the only factor that influences the differences between the degree of risk-aversion of men and women? Graham and Stendardi (2002) argue that this
differences also could be influenced by the way female and male investors process their information. If female investors employ different information processing models from male investors, there may be a need to address women investors as a separate segment based on these differences in information processing methods (Graham and Stendardi, 2002, p. 17). If this influence the degree of risk-aversion of men and women, it could be possible that women are not that risk-averse as the literature conclude so far. They researched whether it is true that female investor are more likely to include incorporate risk and other information cues in their information process than men using the selectivity model. According to the selectivity model, males often do not process all available information cues, but instead are highly selective in their information processing (Graham and Stendardi, 2002, p. 19). It can be argued that the female propensity to comprehensively process all information cues, both confirming and disconfirming, and the male propensity to disregard disconfirming cues, will lead female investors to a greater awareness of the potential disadvantages of a particular investment strategy (Graham and Stendardi, 2002, 21). This support the literature so far, because when female investors are more aware of the “downside” of an investment strategy, they attach a greater risk on this strategy, making it less attractive for women to choose this specific strategy. On the other hand, If men do not include this downside in their
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risk valuation of an investment strategy, this same strategy as noted before would be
attractive for men. That this strategy is less likely to be chosen by women than by men is not caused by a greater risk-aversion of women, but by a different way of processing
information regarding investment decisions.
To conclude this section, Jianakoplos and Bernasek (1998), Dreber et al. (2010), Dreber and Hoffman (2007), Charness and Gneezy (2010), Charness and Gneezy (2004) and Olsen and Cox (2001) all conclude that women are more risk-averse than men when it comes to investment decisions and this could lower their investment returns. However, Barber and Odean (2001) researched gender differences in investment decisions from another point of view and find that men are more overconfident than women, therefore trade more
excessively and lower their expected returns. This means that a lower confidence, which is mostly seen as more risk-averse, is not always a bad thing. Another important factor to describe this gender difference in financial risk-aversion is processing information. They find that women process information differently compared to men. They include more
information in their decision making process, which result in women making different investment choices than men. Their different choice can be interpreted as more risk-averse, but it is not. So, one should be careful with interpreting statement as: women are more risk-averse than men. There could be another explanation for different investment choices and it should not always be interpreted as something negative.
4. Gambling:
The second section discussed in this literature review about women and financial decision making is about gambling choices, which is correlated with the section above. One of the first articles that is written on this subject is from Levin et al. (1988). This paper reviewed the answers of 110 psychology students to gambling options, whereby they received all the necessary information such as probabilities of winning and losing, initial gamble etc. The students were divided in two equal groups, whereby one of the groups got the gamble options in chances of winning and the other groups of chances of losing. They find that women are more prudent in their actions than men. Women think through their actions and their consequences and therefore take less risk than do men. This can be interpreted as women are more risk-averse than men when it comes to gambling decisions.
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experiment, they also find that women are, on average, more risk-averse than men
regarding gamble choices. In their experiment, women were more than four times as likely as men to choose the risk-free gamble and about one-third as likely to choose the highest-risk gamble (Eckel and Grossman, 2002, pp. 290-291).
Another empirical research that focused on gamble choices also came to this conclusion, but from another point of view. An computerized experiment was designed to investigate the probability functions of men and women. Women are more pessimistic when gambles are formed in investment terms (Fehr-Duda, Gennaro and Shubert, 2006, p. 305). Also, women react stronger to losses than to gains. They are more willing to avoid losses than to achieve gains, which also can lead to the conclusion that women are more risk-averse than men.
The previous literature in this section were based on results from students, some with a little financial knowledge and some without any financial knowledge. Schubert et al. (1999) designed their experiment to investigate whether there are gender differences in risk preferences in decisions applicable for investors and managers, people with financial
knowledge and experience. Their experiment consists of two parts. The context part consists of investment (gain) and insurance (loss) questions and the abstract part of gain-gambling and loss-gambling. They find female subjects did not generally make less risky choices than male subject (Schubert et al., 1999, p. 383). In the context part of their experiment, the estimated coefficient for female was not significant, so there were not any gender
differences in the investment an insurance setting. Though, in the abstract part there was a gender difference in risk-aversion. Here female subjects display systematically lower
certainty equivalents in the gain-gambling frame, while they display more risk-seeking behavior in the loss-gambling frame (estimated coefficient of female is significant) (Schubert et al., 1999, p. 384). It is suggested that abstract gambling experiments may not be
appropriate for the inquiry of gender-specific risk attitude when it comes to financial decisions.
5. Management:
There is some consistent gender differences in the nature of decision making; adult females appear less risk propensive than males, females are often less confident in their choices and males, under certain conditions, are less readily influenced than females (Johnson and
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Powell, 1994, p. 123). However, these experiments where mostly done in a general
population and may not be applicable to certain specific populations such as managers. They did a laboratory experiment for a non-managerial population and a managerial population. Unlike what was expected given the previous literature, Johnson and Powel (1994) did not find any differences in the quality of decision making between males and females in both experiments.
Johnson and Powell were not the only one who could not find any differences. Also Master and Meier (1988) and Birley (1989) did not find any gender differences in
populations who consists of male and female managers. However, new empirical research of Niessen and Ruenzi (2007) did find behavioral differences between male and female fund managers. They find evidence for a greater risk-aversion of female fund managers compared with male fund managers. Men appear to have a more extreme investment style, which are less stable over time than those of women, but research did not find a significant difference in average performance of funds managed by female fund managers. However, despite the fact that the gender differences Niessen en Ruenzi (2007) found do not support the view that female fund managers are less qualified to manage a fund, there seems to be a prejudice within the industry against them.
All of the above studies focused on fund managers and portfolio allocation. Maxfield et al. (2010) focused on other managerial contexts, rather than the portfolio allocation. With a survey completed by 660 subject with significant work experience, they find that women are more risk-averse in the portfolio allocation, which supports the majority of literature about this subject, but they also find evidence of gender neutrality in risk propensity and decision making in these specific managerial contexts. But how is it possible that women are still seen as more risk-averse? Because of unrecognized risk taking. Women are still seen as risk-averse because the society does not expect women to take any risk and therefore do not see the things we do not expect (Maxfield et al., 2010, p. 594).
Powell and Ansic (1997) used a database consisting of 126 students (graduated and non-graduated) with a financial specialisation. They were requested to make 12 different investment decisions with all the important information given. They find evidence for gender differences in financial risk preferences in management populations. However, these
differences can not be explained by familiarity, ambiguity or gains and loss framing, but because of differences in motivation (Powel and Ansic, 1997, p. 263). Women and men
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different in their decision strategies, but no significant differences in average performance can be found. However, women are still being stereotyped as less able financial decision makers.
Female mutual fund managers were also being researched by Atkinson et al. (2003). In this study, were an regression is be done on portfolio risk and excess return and were they controlled for wealth and knowledge differences between men and women, it appears that these control variables have a significant impact on the outcome. They find that male and female mangers appear similar in terms of fund performance, risk, and other fund
characteristics (Atkinson et al., 2003, p.17).
The overall stereotype that women are more risk-averse than men does not generally hold. However, under a magnitude of different constellations such tendency is observable. Therefore, firms should be interested in hiring relatively risk seeking men for risk analyses, pushing their firms forward. Women, however, seem to have comparative advantages with respect to an integrated management of risks including communication aspects. Therefore, firms should be especially interested in women for risk management purposes (Schubert, 2006).
Most of the prior empirical research about women and financial management
decisions that did find gender differences did not control for wealth and knowledge. It could be that their conclusions are not valid, because there could be differences in experience with financial decision making or there could be constraints in wealth.
To conclude, all of the empirical work in this section find evidence for gender differences in risk-aversion in non-managerial context. They are unanimous about their conclusion that women are more risk-averse than men when it comes to financial decision making. However, there are contradictions in the conclusions about financial decision in managerial contexts. Some did find gender differences, other did not. However, whether they find gender differences or not, they all agree on the fact that there are no significant differences in average performance of funds managed by men or women. Despite the fact that they are not less qualified to manage a fund, women are still generalized as less able financial managers and this affects the women participation in management functions. Atkinson et al. state that mutual fund families may be apprehensive to hire a female manager if they fear the investors will prefer male-managed funds (2003, p. 18). This statement shows that this stereotyping of female financial managers have a negative effect
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on women financial decision makers and that it is important that the society realizes the conclusion this section, so that the financial sector can benefit from the value of female managers.
6. Pensions:
Most of the pension funds are nowadays based on the idea that people have to invest their pension savings themselves. The risk is no longer for the pensionfund but for the
households. If we consider the conclusions about women and risk-aversion so far, this may lead to problems.
One of the first studies that pointed out this problem is that form Bajtelsmit and Bernasek (1996). They review the literature written about gender differences in portfolio allocations so far and come to the conclusion that there are gender differences towards risk-taking between men and women. As more plans require participants to make their own allocation decisions , differences in risk-taking behavior will imply larger differences in retirement income (Bajtelsmit and Bernasek, 1996, p.4). These differences may have consequences for the future, in particular for women. If women are more likely to allocate their portfolio to low risk investments, their pension accumulations will be lower and they will have lower wealth at retirement (Bajtelsmit and Bernasek, 1996, p. 4). This is also found by Bernasek and Shwiff (2001). Women are more vulnerable than men to poverty in their older age. They earn less than men over their working lives and accumulate less savings for retirement (Bernasek and Shwiff, 2001, p. 345). Given the fact that women live, on average, longer than men, this would have implications for the wealth of older women. Given the survey of 270 households where the primary financial decision-maker of the household was known, the effect of the respondent being a woman decreased the percentage of the pension invested in stocks (Bernasek and Shwiff, 2001, p. 355), which lowers their average return. The lower retirement income of women, which also have to support a longer period than for men, can increase the inequality between retired women and men.
Bernasek and Shwiff results also showed that men who have spouses or partners who are willing to take at least average risk for average return take greater risk in the allocation of their defined contribution pensions than men whose spouses or partners are unwilling to take any risks. Women in the same situation take less risk in the allocation of their defined contribution pensions. This asymmetry is important because it seems to broaden the finding
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that single women are more risk-averse than single men (Jianakoplos and Bernasek 1998) to show evidence of gender differences in risk taking among people who are either married or cohabitating (2001, p. 355).
Watson and McNaughton (2007) did almost the same research, but particularly for Australia. There regression shows an negative (significant) coefficient for gender, which confirms the conclusion of the majority of this subject, that women are more risk-averse than men. They also confirm the prior findings of other research that, even after income and age are controlled for, women generally choose less risky pension funds (Watson and
McNaughton, 2007, p.60). This support the concerns of Bajtelsmit and Bernasek about the retirement income of older women.
7. Conclusion
The degree of risk-aversion of an individual can be influences by a lot of factors, such as confidence, information processing and experience. As found by Zinkhan and Karnade (1991) and Barber and Odean (2001), men are more overconfident than women which make them willing to accept a higher risk. However, this overconfidence leads to a lower average return because they trade more excessively (Barber and Odean, 2001). So, the lower confidence of women may not be that bad.
Differences in information processing leads to different levels of risk-aversion between men and women as well. Women tend to process all available information cues, whether men are highly selective in their information processing (Graham and Stendardi, 2002, p. 19). It can be argued that the female propensity to comprehensively process all information cues, both confirming and disconfirming, and the male propensity to disregard disconfirming cues, will lead female investors to a greater awareness of the potential disadvantages of a particular investment strategy (Graham and Stendardi, 2002, p. 21). This could be one of the reasons that women are (wrongly) stereotyped as more risk-averse than men.
Also, the more familiar a women is with a specific type of decision problems and the more experienced she is in the corresponding domain, the more risk loving she will be (Levin et al. (1988); Johnson and Powell (1994); Schubert et al. (1999)).
However, It should be noticed that a lot of the literature discussed in this paper used the statement: women are more risk-averse than men. Statement like this are one of the
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main causes that women still are being stereotyped as “risk-averse” and as “less able of being a financial decision maker”. They generalize men and women, which means that every member of the sex “women” should be risk-averse or that greater risk-aversion is an
essential characteristic of womanliness or that greater risk-seeking is an essential characteristic of manliness (Nelson, 2012). Statements as “women display, on average, more risk-averse behavior than men in this particular study” should be more appropriate. The idea that women would "bring something different" to finance is dangerous because it (1) exaggerates sex differences in behavior far beyond the degree supported by research (2) stereotypes women (albeit relatively benevolently) as lacking in adventuresomeness and competent only in doing (financial) mopping up, and (3) lets men and markets morally and socially "off the hook" for the consequences of careless and irresponsible actions (Nelson, 2012).
Another important remark is that there may be a bias in the literature. Empirical work with statistically significant results are considered to be more publishable than the finding of a lack of statistical significance. Although this paper tried to review all the available relevant literature on this topic, there may be more studies that could not find gender
differences, but could not be found because they were not published or not being put in any database.
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