When relating attitude towards risk with gender, the traditional idea is that women are more risk averse than men and leads to the conclusion that if we had more women leading the financial world – as portfolio managers, head analysts, decision-makers, CEOs, and investment bankers – then we probably would have skipped the great financial crisis of 2007-08, and many others.
Women are traditionally seen as more sensible investors and more responsible managers. The structured finance products that were traded amongst investment bankers at the heart of the booming 2000s would probably have never existed if women were at the head of risk management roles so the theory goes.
Many are the studies, books, and articles written around the idea that women are more risk-averse and better risk managers than men. In the particular field of spread betting for example, there are many references to this matter. Investment books always mention that women are much better at cutting losses than men. The main explanation is that women seemingly don’t allow losses to accumulate, but rather prefer to cut them at earlier stages and move on. While in contrast, men show more resistance to the idea of selling at a loss and sometimes let it roll until a monster loss accumulates.
Males are actially more sentimental regarding the outcome of their investment decisions and, while cutting losses earlier increases the odds of doing a good job, it also represents the final acceptance of a mistake, something which men are less keen to allow for!
In a world where investors and financial decision-makers are not completely rational, but in part led by their emotions, any small piece of extra rationality represents a great advantage. If women are so different than men regarding their attitude towards risk, and if that is a real advantage, why aren’t hedge funds filled with women?
While the difference between men and women seems to be well documented, the truth is that this alone is not enough to justify a better attitude towards risk management. A recent study conducted by investment bank Merrill Lynch shows that while the difference in attitude exists, when factors such as education, employment, and financial wealth are taken into account, the different does not actually persist, that is, gender loses significance.
Merrill Lynch conducted a survey with 11,500 individuals, with 5,000 being women. The survey asked its clients and prospective clients to react to 27 assignment questions designed to reveal their attitude towards investment. They found that both males and females are strongly influenced by emotions, which can either result in positive or negative outcomes. When it comes to differences in risk attitudes between the two groups, they also found that women are in general are however more conservative, in line with many other studies and traditional wisdom.
Understanding the real reasons behind the differences in risk attitudes is of key key importance. For that matter, Merrill further refined the conclusions with the information they obtained from several questions, in particular regarding financial knowledge. Women, horror of horrors (and don’t shoot the messenger!) show a lower level of financial literacy than men.
When answering the assignment question “I know less than the average investor about financial markets and investment in general”, 73% of men disagree or strongly disagree while the percentage among women decreases to 45%. Women in general know less about investment than men, or they require a higher level of knowledge than men to be as confident. The different level of knowledge perception is the chief reason why the risk attitude differs with gender. When this factor is taken into account, and some control is introduced to compare men and women with the same perceived knowledge, the difference in risk attitude becomes insignificant.
Past research attempts to solve the gender puzzle in relation to the attitude towards risk, with many studies pointing to women being more averse to risk, and guided by rationality. But when several factors are taken into consideration, the difference is explained by the lower interest women in general place in financial markets, which leads them to seek financial advice instead of incurring as much risk as men.
My father takes much less risks than my mother when the time to deal with the stove comes, but that is just because he is far less knowledgeable than her. Were it Jamie Oliver, the final comparison outcome would no doubt be much different!