How Risk Averse are Women in Finance? Gender & Finance Literature Review Series #2
This week we review the article “Individual Risk Attitudes: Measurement, Determinants and Behavioral Consequences” by Thomas Dohmen, David Huffman, Armin Falk, Uwe Sunde, Jurgen Schupp and Gert G. Wagner published in the Journal of the European Economic Association in 2011.
Their article explores how risk-taking attitudes vary and factors that affect this attitude. They show the correlation of ‘the willingness to take risk’ in people with the decisions made in various sectors of their lives. Dohmen and others (2011) use data from the German Socio-Economic Panel (SOEP) surveying 22,000 individuals and compare it with the results from a lottery experiment conducted on 450 individuals.
Estimating risk attitudes
The authors ask individuals how willing are they to take risk in general on a scale from 0 to 10 and further question their willingness to take risk in the context of driving, finance, sports, health and career. Through regression analysis they see that demographics and physique of the person have an impact on the will to take risk. Dohmen and others (2011) find that women are more risk averse than men, that older members of the group are more risk averse than the younger and that having an income and wealth are positively related to risk-taking. In addition, they also find that the will to take risk is directly related to the person’s height and his or her parent’s educational background. These results are further confirmed by the regression studies on the reactions to a lottery game carried out on a smaller population.
Through another regression study on the SOEP survey, Dohmen and others (2011) compare risk attitudes in different contexts and find that people are most willing to take risk with their careers and least willing to take risk with their health and financial matters. These preferences are brought forth by the actions of these individuals in real-life scenarios. For example, a person who is self-employed, naturally has a high preference to take risk in the career forefront.
Implications for gender and risk attitudes
It is important for us to note that Dohmen and others (2011) conclude that women have a lower willingness to take risk than men. They also concretely find that people have the lowest preference to take risk in financial matters and highest for their careers. From this it can be implied that that women in finance may have chosen the field of finance with greater confidence as they are least likely to take risk in both career and finance. In addition, they are also extremely likely to calculate their decisions in the field more carefully in order to avoid high-risk situations.
Use in the Gender & Finance project
One of the aspects of the Gender & Finance project is research. This research uses experiments to better understand the behavior of individuals in terms of financial decisions. It is based on the simulation tool SimTrade, which allows one to study the reaction of participants to gender-related events. At the end of simulation a survey is proposed to participants. One of the questions is about their risk attitude towards risk. This question uses the general question formulated by Dohmen and others (2011): How willing are you to take risk in general?
You can download the PowerPoint presentation and research article below.