Are you a risk-taker?
Posted on September 22, 2006 10 Comments
This is a really important study to take note of. Basically, some researchers found that financial advisement professionals often miscalculated the risk-taking willingness of their female clients. This is one of many reasons why women get smaller returns on investments than men, typically. (For details, you’ll have to read the full article.)
Knowledge is power, and it’s up to us to make the change. If you think your financial advisor isn’t aware of how much risk you’re willing to take, call him/her on it. It will make a difference.
I can’t say that I’m a risk-taking individual myself. I tend to be pretty safe, especially when it comes to money. (Could it be because I have nothing to fall back on? I often wonder who these “high-risk” takers are. In my mind, it’s likely they have a support network (read: with money) in case they fall on hard times. Will anyone keep up with my student loan payments, my rent, if I lost it all? Doubtful.)
But there must be some risk taking females out there! So if you are a risk-taker, man or woman, make sure you let your financial advisor know it. If you feel you’re being short-changed, then maybe it’s time to make a change.
Girls Just Wanna Have Funds
By Lisa Scherzer Published: September 21, 2006
Courtesy of Smart Money
FROM HOW THEY think about relationships to the way they drive, men and women are different. These stereotypes might raise a few female eyebrows, but countless studies attest to the existence of a gender divide, which extends to finances as well. However, the most common assumption when it comes to money and investing, that men are more tolerant of risk, could be needlessly costing women valuable portfolio returns.
Mike Roszkowski, director of institutional research at La Salle University in Philadelphia, has no doubt that gender differences exist when it comes to taking risk Â? be it trading stocks or jumping out of planes. The critical question Roszkowski asks is what those differences Â? both perceived and real Â? mean for investment purposes.
Answers can be found in a paper he co-authored with John Grable of Kansas State University titled “Gender Stereotypes in Advisors’ Clinical Judgments of Financial Risk Tolerance.” The analysis set out to see how accurately financial advisors gauge their male and female clients’ risk tolerance. Roszkowski discovered that advisors, whose job it is to know and understand clients’ needs, have a distorted sense of the risk tolerance of men and the risk aversion of women.
As Roszkowski notes in his paper, risk tolerance is considered one of the most important personal circumstances an advisor needs to learn about a client. And too often, he found, they get it wrong.
“If you ask why are women earning lower returns on their investments, part of it is that they are in fact lower risk-taking,” he says. “But it’s also because financial planners tend to assume they’re more risk averse and will not even advise certain riskier investments that may give higher returns.”
We asked Roszkowski to elaborate on the costly impact of this gender bias on women investors, and, more importantly, to explain how the stereotype can be overcome.
SmartMoney.com: Is the idea that women are less risk tolerant when it comes to investing pretty much accepted as fact now?
Mike Roszkowski: The majority of studies point to men being more risk-taking and women being more risk averse. A few studies question it. But most findings are pretty robust. There was an article a few years ago that looked at risk taking. It was a meta-analysis that looked at many studies. What it found was most of the studies identify a risk-tolerance difference favoring men. But one of the more interesting things Â? depending on the year of the study Â? the differences were getting smaller. In the more recent studies, the difference was not as large as it used to be.
The question is, are we looking at differences that are biologically based or is it environmental? The difference does exist, so I think there is a biological factor involved. The explanation, evolution-wise, is that women are caretakers. They have to provide protection for their offspring so are more risk averse. I think the explanation is a combination of the two. The social differences are diminishing; women are working more and are being exposed to the same environmental factors men are.
The question is, why is the difference there? It’s both biological and environmental…. One study I read made an impact on me. It looked at birds that scattered seeds around a scarecrow. They found that the male birds approached the scarecrow more closely than female birds. There is a biological factor in there. There’s also a social factor…. The study we did picks up on the social factor.
SM: How did your financial planners perceive the risk tolerance in their male and female clients?
MR: In this study, we asked financial planners to give us a 10-point rating of their clients for risk-tolerance analysis. They didn’t see what the person scored on the risk-tolerance test. The “clients” completed the risk-tolerance test, and we compared the ratings that the planners gave the clients vs. the results of the clients’ tests. All pointed to the same thing: Financial planners tended to overestimate the risk tolerance of male clients and underestimate the risk tolerance of female clients. In other words, the rating should’ve been higher for the females and lower for the males.
It showed there’s a pattern that financial planners tend to think their male clients tend to be more risk-taking than they really are…. We think it’s got implications for practice. It’s true that females tend to be lower risk-taking. But financial planners are, in fact, stereotyping. They’re attributing a lower level of risk tolerance to female clients than they really deserve. They’re penalizing women even more on the issue of risk tolerance.
SM: What are the real-world consequences of exaggerating gender stereotypes about risk when it comes to financial advisors giving people investment advice?
MR: If you ask why are women earning lower returns on their investments, part of it is that they are in fact lower risk-taking. But it’s also because financial planners tend to assume they’re more risk averse and will not even advise certain riskier investments that may give higher returns. The problem is that in many cases the planner is not going beyond what the [individual client] tells the advisor [about their risk tolerance].
On another study we’re working on now, we asked people to estimate their own level of risk tolerance. Again we found the same sort of thing. Women tended to underestimate their own risk tolerance. Males tended to overestimate. [A test involving specific investment scenarios was administered to gauge risk tolerance.] In this [previous] paper, we found financial planners tend to stereotype [based on gender]. But it’s also true of clients themselves. If a financial planner is talking to a client, and all he asks for is the client’s self-opinion, she’ll probably underestimate her risk tolerance if it’s a woman and overestimate if he’s a man.
The solution, we think, is a more systematic approach to find out clients’ risk tolerance. We advocate a standardized test to assess that. That way you don’t have biasing factors in the equation.
SM: What about studies that have concluded that women, on the contrary, do not fear risk?
MR: Those studies are a minority…. I can tell you with certainty that studies that find no differences are the minority. There are chance findings. But in order to get a complete picture of something, you have to look at all the studies. That’s why they do a meta-analysis. There’s certainly a sex difference. Not only does it occur in humans, but in animals as well.
What I will concede is that the differences between men and women regarding risk tolerance in the more recent studies is less pronounced than in the older studies from the ’50s and ’60s. That’s because women have become more involved in the work force and taken more control of their finances since then. They’re more educated about their investments. Unknown risks loom larger than known risks.
SM: Is there an implied favored level of risk tolerance in this issue? Is it necessarily better for women to be less risk tolerant and men to be more?
MR: You have to think about it in aggregate. On average, people who invest in riskier products do better in the long run. That average is going to include people who lose their money in riskier investments. The literature says in the aggregate you’ll do better with these riskier investments. I think the whole idea is about investing that goes along with your risk tolerance; you should invest in things that will let you sleep at night.
There are stereotypes. There are two thoughts about what stereotyping is: one is that they’re completely false, and you’re projecting your false impressions on the person. The other idea is that there’s a kernel of truth to it. Yes, we tend to overgeneralize based on things that are partially true. There is some scientific truth to say women are more risk averse than men. But we tend to overapply that. If, in fact, 20% of women are risk averse, we tend to think 80% are.
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10 Responses to “Are you a risk-taker?”
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September 25th, 2006 @ 12:33 am
It is so true that without risk there is no reward.
What is the worst that can happen? We lose some money and we make a mistake. money can be made again and mistakes can be learnt from.
September 28th, 2006 @ 4:03 am
I think that most planners overlay there own risk factor on to clients. This is probably a survival tactic as many advisors blew up or were arbitrated into oblivion after the dot.com disaster. If you are risky by nature speak up if you have an advisor. Good advisors are more likely to understimate a young persons risk tolerance, or accurately estimate what is too painful for you to acknowledge. Good luck….
October 10th, 2006 @ 5:05 pm
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October 13th, 2006 @ 6:52 pm
Very interesting. I think most of are risk tolerance comes from our parents.
October 17th, 2006 @ 3:51 pm
Risk tolerance comes in two parts, capacity to accept risk and willingness to accept risk.
Take for example Ms. Budgetbabe. She has tremendous capacity to take on risk (she’s young, has few dependants, stable employement, reserve capital, etc). However, equally important is one’s own internal willingness to take on risk. This is where the differences between men and women are quite marked. Men are generally willing to take on risk beyond their capacity while women dislike taking on risk upto their capacity.
A decent advisor should have explained the two concepts (and their difference) to a client. They shouldn’t push clients into risks they have no willingness to accept, they should explain that a client’s willingness is quite different from their tolerance and let the client make an informed decision. Of course wise council is rare and should be valued.
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September 8th, 2009 @ 1:36 am
Surefire ways to succeed in the stock market – know your niche, evaluate investment risk, diversify your portfolio and invest according to your risk.
use the Risk management Pyramid concept.
Base of the Pyramid -should consist of low risk investments like bonds, mutual funds, ETF's and others.
Middle tier – consist of stocks, CD's and others
Summit – consist of high risk investments such as option trading, collectibles and others.
From there, you will have an idea on where to put your money and how much.
If you are working with a financial advisor to help you with your investment, be sure that you invest according to what you think is best and not because your advisor tells you to. It is your money and you should be more involved in your investments. Also, choose an advisor that has years of experience in the trading floor.