Differences In Risk Taking Behaviors Between Men And Women In Investing: [Essay Example], 3689 words GradesFixer
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Differences in Risk Taking Behaviors Between Men and Women in Investing

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The literature has so far investigated if there is a gender difference in risk tolerance and risk perception, thus affecting subsequent risk behavior.

Men and women have been found to assess risk differently, with women being, on average, more risk-averse due to factors like confidence levels, that differ from the ones of men, and emotional factors. An analysis of survey data states that 34% of the public perceive financial men to be better at risk-taking and only 5% perceive women to be as good as men.

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Also, when evaluating retirement investment options, women are found to be more risk-averse: they prefer safer fixed-income vehicles rather than more risky common stocks on account of their lower income and higher expectations of life. As a result, since they invest in less risky solutions, they earn a lower return in the long-term period. Compared with females, males are more risk-seeking they are willing to own a greater number of common stocks. This happens because the financial products and services offered by the market are not used in the same way by people (Watson, 2007).

The literature provides further evidence that women prefer safer firms, they invest less in the stock market and take less risky portfolio choices. They show a greater preference for firm’s liquidity, trading volume, dividend payments, stock price and firm’s age compared to males across financial professionals and institutional investors. Female investors avoid risk and tend to prefer liquid stocks and dividends mainly because they prefer a secure income form. Moreover, providing more information to women in a risk investments situation may be paid off by higher returns, which can reduce the gender gap in firm’s characteristics preferences and consequently in investor’s behaviors. If gender equality is prioritized in investment and risk-taking contexts, women could be more informed and earn higher returns, which allows firms to create shareholder’s value by focusing on attracting a female target of clients.

General Explaining factors

The main differences in investing behaviors between men and women are dictated by their diverse risk perception and attitude. Women are considered to be more financially risk averse and conservative, given their smaller amount of investments when compared to men. Furthermore, when women express their preferences in risky situations, they are more concerned about the specific situation they are living and the frame in which such a context is. They are also considered to be less competitive than men and, for this reason, their investing activity is characterized by a smaller traded amount. The different risk aversion of women and men is explained through a huge variety of factors with the support of literature.

A first explanation is given by their biological components, the higher level of monoamine oxidase enzyme in women, explains their risk seeking inhibition and their consequent risk seeking behaviors when compared to men. In addition, the biological evolution of women requires they have to become more risk intolerant as soon as they become mothers and have the burden of responsibilities toward their children. Another explaining factor is the more restricting parenthood monitoring activity for girls which account for their avoidance of risky behaviors in later life. Sociopolitical factors as status and power have always played a big role in women risk aversion producing some female stereotypes in the society, especially during the years before the feminist movement of 1960s and 1970s (Flynn, Slovic and Mertz, 1994). Moreover, women lower of income has been considered as a great contribution to women higher risk intolerance because, on average, they have historically earned less income than men.

Behavioral factors

We have seen that a crucial component of any financial model is the way in which market actors form their expectation of prices which is mainly based on their beliefs, preferences and other behavioral factors.

Behavioral experts and psychologists state that decision makers incorporate emotions in their decision-making process and, therefore, individuals should be aware of their bounded rationality. For example, when taking their investment decisions, individuals are influenced also by the behaviors of people surrounding them, as in the case of crowd psychology. When having herd behaviors, they are less analytical and do not feel the burden of responsibilities, especially in case of a negative outcome, since they know any consequence is shared with the other group members. Moreover, individuals make their judgement in a new situation with a memory biased especially by emotions. These behavioral factors, can be mainly categorized in cognitive and emotive factors which are not the same between men and women and influence their risk perception in different way, resulting in women being more risk averse than men as largely demonstrated in the literature.

Cognitive factors

It has been demonstrated, within the field of behavioral finance by social and psychological experts, that a great number of cognitive factors influence the risk perception of economic agents such as managers and investors. In particular, the focus has been on many aspects: risk acceptance related to social concerns, the cognitive and heuristic biases affecting the way information is converted, the distinction between perceived risk and actual risk, the impact of personality traits and demographic characteristics of different subjects, the focus on statistical data applied to hazardous activities and risk communication plans and, finally, the role of cultural factors.

The most important factor that influences the perception of risk is the overconfidence, an extreme belief in oneself and one’s capabilities, that stimulate extreme self-reliant behaviors in risky decisions. This happens because economic agents sometimes consider themselves invulnerable to the negative outcome of some risky and hazardous activities, and they tend to underestimate the probability of occurrence of dangerous situations, especially because they are overconfident in their skills and capabilities. Heuristics behaviors, have been explored because they negatively impact and cause a cognitive bias in the decision of economic professionals in situations with strong uncertainty. Heuristics are mental strategies, deriving from past experiences, that incite investment errors since investors use mental shortcuts and over simplify their decision-making process.

Optimism and wishful thinking represent another bias in the behaviors of humans who strongly believe to have driving skills in their decision which are above the average and are confident to successfully reach any objective in time. For this reason, it is argued that men are more optimistic and when making an investment decision they focus more on its potential benefits than on potential costs. Furthermore, when getting a successful result they attribute it to their inner abilities and not to lucky circumstances as women usually do.

Another important factor affecting the risk perception is the representativeness, a sort of mental heuristic process involving shortcuts and abstracting rules already known and familiar to humans, used to simplify and better manager a complex decision-making process. Its effect on investment decisions can be negative, since investors relate the success or failure rate of e previous performance to the new one. Representativeness also causes another bias, the “sample size neglect”, that is very common in situations when people tend to generalize to a greater sample or the whole population the results coming from a sample size and they consequently infer too quickly conclusion on the basis of little available information. The final outcome of this latter biased behavior is the “gambler’s fallacy effect” according to which if an outcome is verified more frequently than normal during a given period, in the following period there is an high probability to obtain the opposite outcome.

The process of anchoring refers to the tendency of people to solve complex problems by reproducing a particular state in the mind to achieve a past situation or reference point and is similar to the concept of representativeness. These two processes are also linked to the familiarity bias altering the individual risk perception. As a matter of fact, people are more risk-tolerant and risk-seeking when they have familiarity and a strong knowledge and awareness of the specific situation they are dealing with and, on the other side, they have exaggerated reactions and they tend to have little flexibility when they deal with an unexpected or unknown turn of events. The familiarity bias has been the main object of behavioral accounting finance. For example, investors prefer to invest in domestic stocks or local companies rather than international ones, because familiar assets are perceived as less risky than unfamiliar ones.

Another issue investigated by psychologists is the way economic agents perceive the control they have on situations and the belief that, by monitoring and controlling an uncertain situation, they can have a strong influence in determining a positive outcome.

An important relation between the level of knowledge and expertise and the risk perceived has also been under analysis and considered as a factor influencing risk-taking behaviors. As a result, risk is more highly perceived in situations where the knowledge of a situation is little or perceived to be low.

The role of overconfidence

The most important explanation given by the literature gender-based differences in risk attitude is the level of awareness and confidence. The literature has found that both male and female investors are overconfident. Considering the role of the cognitive factor “overconfidence” as fundamental in this research paper, women are considered to be less overconfident than men. For example, women, have less knowledge of financial products and finance field and this leads to a lower level of overconfidence.

With regard to the relative performance of their investments, men are in general more overconfident and, when it comes to gamble, they are more willing to accepts risks (Niederle and Vesterlun, 2007). The gender-based difference in their level of overconfidence is mainly due to the way they interpret risky situations. It is more likely that men investors will consider a risky situation as a challenge and women investors will consider the same one as a threat, on account of their different competitive spirit, with men showing a stronger competitiveness, which is considered as an emotive factor in this paper.

Although both men and women are overconfident, men have higher level of overconfidence, and one of the negative consequences of it is usually a more frequent trade and lower gains. In general, overconfident investors have a lower expected utility: they trade too much; they have unrealistic beliefs about their high returns and how they are estimated; they hold portfolios which are riskier than the ones hold by rational investors with the same degree or risk aversion.

While both men and women have higher level of confidence, women are less over-confident than men, especially for tasks perceived in masculine domains such as the finance field where they have less experience.

Also according to the Survey of Consumer Finance, women are more risk-averse: 60% of them are not willing to take any financial risk, while only 40% of men display this characteristic. Moreover, only 47.8% of women have a good extensive investment experience, while 62.5% of men are considered to have it. This difference is even greater when comparing single women and single men. Furthermore, men have a greater self-attribution bias, since they have a tendency to attribute to them-selves the success of their investments and not to lucky circumstances (Barber and Odean, 2001).

We have seen that overconfidence plays a pivotal role because it is the main behavioral bias of irrational investors. From one hand rational investors should improve their performance by trading more, since they have perfect information as they trade only if their expected gains exceed transaction costs. On the contrary, irrationally biased investors hurt their performance by trading more, and, in this particular case, men are more underperforming than women, since they are more overconfident and have an higher trading activity.

Such a higher trading activity is also explained by the fact that male investors trade a small portion of their wealth for entertainment and a bigger one for investment with more prudence.

In conclusion, many researchers state that there is a small statistically significant gender difference in behaviors (5%), due to diverse cognitive and emotional factors. And this difference may also cause significant difference in performance of funds, with men trading more and earning lower return.

Emotive factors

The role of emotive factors in the behavioral finance field, even if with little delay, has been a subject of study, as well as the role of cognitive factors, for their impact on behaviors and assessment of risk.

During the late 1990’s many social and psychological experts began to explore also the role of feelings in the distortion of reality during a decision management process. The emotional aspect of risk generally differs from the cognitive one, although they both have the same significance for risk perception.

The negative feeling of worry is an emotional process that causes fear, concern, anxiety and influences the rationality of decision-makers with a greater influence on women. In the everyday life, investors deal with the burden of uncertainty and the unease and nervousness related to it, especially when they hear bad news from the market concerning a decline in the stock prices.

Risk has been influenced by affective evaluations. Affect is the first step in the formation of the emotional response process and it precedes the cognitive one. It is considered as the very first emotion felt when responding to incitement, or, more exactly, the positive or negative feeling assigned to a stimulus. The affective evaluation of a situation is nothing more than the positive or negative impression of it, and, as such, it can play a pivotal role in situational judgements and risk evaluation.

Sometimes companies, on account of their great brand engagement and image reputation, cause positive affective evaluation: in this case, the offered value of the stock can appear extremely good and appealing. Moreover, the risk related to the investment in such stock is less perceived than the risk of investment in companies stimulating negative affective evaluation especially in the women investing mental framework (Constants, 2001).

The same problem comes from the optimistic or pessimistic mood that causes contradictory behaviors, with women found to be more sensitive to their mood.

Social preferences are also modeled into the economic literature to analyze the affective evaluation dimension. They are modelled as altruism and inequality-aversion and women have been proved to be more other-regarding and sensitive to social issues than men, having then stronger social concern. Being more inequality averse, women have also been found to be less efficient in asset allocation on account of the strong existing correlation between their decisions and the specific social context in which they are yielding their investing strategies.

Another emotive factors accounting for different risk profiles is the competitiveness. Many research studies demonstrated that women, even the most able and courageous, prefer to stay away from competitive environments and, when taking part to a competition, they systematically under-perform relative to men, even if they are able to perform similarly to men in non-competitive situations. The female disadvantage is consequently particularly large when females compete against males rather than against other females (Derevensky, 2006).

Men are more seeking for competitive engagement than women and when they are in competition with other investors, they act with extra effort to increase their performance, while women do not put the same effort. Moreover, men are more excited to take parts into gambling activities because they give a higher weight to their potential reward, while women consider gambling activities as social ones to have fun. For this reason, women are more concerned about losing money in gambling then men and they are less seeking for competitive environment. This different propensity to competitiveness is also due to the effect of biological measurements. The greater presence of hormones as testosterone and cortisol in the men’ biology result into more aggressive and competitive behaviors (Croson and Gneezy, 2009).

Another emotive factor is the adventurousness, which is usually considered as a specific male characteristic. Also this feature, as the competitiveness, is mainly evident in the great gambling activityof men and in their choice for more extreme sports. As a result, men are more risk seeking due to the reason that men are generally more adventurous than women (Zuckerman, 1994).

The role of emotions

The most relevant dimension to explore is related to the role of emotions in the risk perception context because the affective reactions, caused by emotions, are considered to be better predictors of a risky choice than cognitive and reasoned responses.

For example, men consider financial elements as salaries to be very significant for their happiness, while women say that money is not important. Although their different consideration for money, women are more emotionally biased with regard to money because when they spend, they have pleasure in the short-term and regret in the long-term. Previous researches from Psychology demonstrate that women are more risk averse because they experience emotions more strongly than men and the utility of their risk decision can be modified by such emotions. A negative outcome can be experienced as worse by women than by men because they feel nervousness, anger, anxiety and fear more heavily.

In identical situations, when facing a risk, women tend to feel fear as the first emotional response while men tend to feel angry and when individuals are angry they evaluate gamble as less risky than when they are scared. In response to the September 11th, where men felt more anger and women more fear, optimistic beliefs about future investing decisions where found in men responses while women experienced more pessimistic behaviors. As a result, women tend to trade less than men, since they are more afraid when assessing gambles.

As a primary consequence of the role played by the emotions and affective evaluations on men and women risk perception, they have different preference in pension investment allocation decisions. When having the choice to direct their pension contribution to assets with diverse risk profiles, women have a less aggressive style and take more conservative decisions than men. When deciding to invest among employer stock, a diversified equity portfolio, a government bond portfolio, a social choice equity funds or a guaranteed interest fund, women were more likely to prefer the guaranteed interest fund, while men preferred the employer stock. In general, men are more willing to invest in riskier assets than women. There are further explanations for the greater level of conservativism in women decisions.

First, women’s greater life expectancy is the primary factor accounting for a less conservative approach to retirement investing: they expect to have a greater wealth accumulation during their longer life.

Second, another factor that influences risk behavior is the investors’ marital status. Because of their greater sensitivity, women feel more heavily emotions as worry and fear for their partner and family and they give a greater weight to the burden of responsibility of having a marriage or a family. They believe that the amount of responsibilities after marriage dramatically increases and makes them less tolerant to risk. In general, people who are married exhibit less risky behavior in their investment decisions than single people.

It is also worth saying that, on the other hand, many researchers argue that marriage may encourage a married couple to invest in riskier assets since they consider a second income at the basis of a safer family environment in case of a financial loss. For this reason, in our investigating paper, we consider also the marital status variable to understand to which extend it accounts for the different risk perception and to further analyze the role of emotions.

Women in the financial world and their lower level of confidence

Along with the emotive factors, we have seen that overconfidence is one of the most important factors influencing women risk aversion. The lower level of women overconfidence could also be explained by their minor presence in the financial world. Although the number of women working in the financial sector increases slightly over time and gives rise to a greater interest in gender differences in financial decision-making, men are still representing by far the majority of workers in this sector. For example, in the mutual-fund industry the ratio of men to women is nine to one.

Women are considered more risk averse than men and, therefore, are less willing to take a career in this sector that is perceived to be risky. Despite recent contradictory evidence, stereotypical beliefs 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 is a major cause of “overconfidence bias” in the fund industry. Overall, the smaller predominance of women in the fund industry and more generally in the financial industry, is found to be very relevant to the lower level of women confidence and it can be explained by different factors.

First, on average, investors are men and prefer to invest in funds managed by men. This is due to the familiarity bias: they prefer to deal and communicate with other people having their same features and interests, even not knowing that they are affected by this cognitive bias. Therefore, there is a greater demand for male financial experts.

Secondly, the sex-partition phenomenon according to which men, in order to avoid misinterpretation of the interest in working together as a sexual interest, prefer to initiate the business with colleagues of the same-sex, and this makes raising capital for women even more challenging, while the demand for men in the industry keeps increasing.

Lastly, women, having a financial experience on average 10 years less than men, are less chosen as professionals in the fund industry because they appear to be less expert and consequently less trustable than men. For example, only few women are funds managers and are allowed to have big financial responsibilities. In fact, according to a recent survey in the investment industry, there are more financial male traders or analysts, since they start to enter the investment banking or private equity industry at an earlier stage than female. Men often receive a sophisticated training on buying stocks, bonds and other assets with client money. In this way they can work in the so-called “front-office”. Contrarily, women in the finance field tend to be assigned to “middle-office” or “back-office” positions handling legal, operational and marketing issues, being rarely involved in important investment decisions, especially, when related to the fund industry. As a result, women, in order to attract more investors, constantly have to demonstrate their skills and their investment must outperform men in order to survive in the funds environment.

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Differences In Risk Taking Behaviors Between Men And Women In Investing. (2021, March 18). GradesFixer. Retrieved May 11, 2021, from https://gradesfixer.com/free-essay-examples/differences-in-risk-taking-behaviors-between-men-and-women-in-investing/
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