1. Guidelines for the assignment
In your paper, you should include the followings:
Indicate briefly the main aim of the article.( not summary of article)
Indicate briefly the main findings(indicate whether the study's findings support the main aim of the article).
What is the main contribution of the study to the existing literature?
What limitations do you see in the article? (provide couple of suggestions for further research).
Gender differences in financial risk tolerance.pdf Gender differences in financial risk tolerance Patti J. Fisher a,⇑, Rui Yao b aVirginia Tech, United States bUniversity 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 behavior 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 result from gender in and of itself. The individual variables that moderate the relationship between 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 & Zarri, 2015). Risk 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, 2004). Financial risk tolerance is the level of discomfort that an individual is willing to accept while risking current 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 risk 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, 2010). An investor with lower risk tolerance requires added compensation to accept uncertainty when faced with an investment that has a variable payout (Hanna, Waller, & Finke, 2008). Thus, 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.2017.03.006 0167-4870/! 2017 Published by Elsevier B.V. ⇑ Corresponding author. E-mail address:
[email protected] (P.J. Fisher). Journal of Economic Psychology 61 (2017) 191–202 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 broader 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, 2005). There 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 (1994) stated 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 lower financial risk tolerance and invest financial resources more conservatively than do men (Bajtelsmit, Bernasek, & Jianakopolos, 1996; Embrey & Fox, 1997; Faff, Mulino, & Chai, 2008; Grable, McGill, & Britt, 2009; Hallahan et al., 2004; Hinz, McCarthy, & Turner, 1997; Neelakantan, 2010). Among common stock investors, Barber and Odean (2001) found that men are overconfident and trade more frequently than women, thereby reducing their returns relative to those of women. Lemaster and Strough (2014) investigated gender differences in risk tolerance, and found that gender identification, or 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 (2015) also 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, 2008). In the current 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, 2011). For 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, 1994). Conservative investments can lead to lower 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 between 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 risk seeking, is a personality trait (Plax & Rosenfeld, 1976). Risk tolerance levels were a function of the specific task, decision frames, and information processing strategies (Schoemaker, 1990; Weber & Milliman, 1997). Individual financial risk toler- ance was assumed to be a main determinant of asset allocation choices, security choices, and goal planning strategies (Grable & Lytton, 2001). Van de Venter, Michayluk, and Davey (2010) found 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. (2004) found that gender was a significant determinant of risk tolerance, such that women were sig- nificantly more risk averse. Cupples et al. (2013) found 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 married couples. Similarly, Sunden and Surrette (1998) found single women to be less risk tolerant than are single men. The results of Yao et al.’s (2004) study showed that both married and unmarried females have lower risk tolerance than do married men, while unmarried males exhibit the greatest risk tolerance. Yao and Hanna (2005) found that risk tolerance was highest amongmarried men, followed by unmar- ried men, unmarried women, and finally, married women. Yao et al. (2011) found a negative relationship between being an 192 P.J. Fisher, R. Yao / Journal of Economic Psychology 61 (2017) 191–202 unmarried female and risk tolerance. However, in contrast to the findings above, Grable and Joo (1999) and Hanna, Gutter, and Fan (1998) did not find that gender was a significant predictor of financial risk tolerance. Researchers also have examined gender differences in financial risk-taking behavior. Xiao (1995) found 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 (2002) study 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 (1995) did not find a gender difference in the dollar holdings of stocks, and Arano, Parker, and Terry (2010) found 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 (2010) showed that gender differences in risk tolerance accounted for approximately 10% of the gender difference in accumulated wealth. Cupples et al. (2013) found 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