Financial Decision-Making: Are Women Really More Risk-Averse?

40 males, 33 females gain-gambling (gain domain) loss-gambling (loss domain) a Contextual frames. b Abstract gambling frames. studies, the application of experimental methods provided stronger control of the economic environment in which decisions were made. We elicited data which call into question the prevalence of stereotypic risk attitudes in financial decision-making. First, we find that the comparative risk propensity of male and female subjects is strongly dependent on the financial decision setting. Second, and more important, we observe no gender differences in risk propensity when subjects face contextual decisions. Since in practice financial decisions are always contextual, our results suggest that the above gender stereotype may not reflect true male and female attitudes toward financial risks. I. Gender-Specific Risk Behavior: An Experimental Design Our experiment was designed to examine gender-specific risk propensity in decisions relevant for investors and managers. Table 1 gives an overview of the experimental design. In the main treatment, we implemented risky choices in the form of investment and insurance decisions. Choice behavior in this treatment (henceforth called the context treatment) directly measures the risk behavior of male and female subjects in contextual financial decisions. We also ran a control treatment in which the same risky choices were presented as abstract gambling decisions. This control treatment (henceforth called the abstract treatment) allows us to validate the risk behavior induced by our experimental procedure in the light of the above-mentioned gambling evidence. In the context treatment, subjects were confronted with risky choices in two different decision contexts. Subjects first had to complete a series of investment decisions. They were then presented with a series of identical choices, this time, however, framed as insur1 Wealth effects from income differences outside the laboratory may still affect risk behavior in our experiment. They are controlled for in our model. 2 Experimental instructions are available in German from the authors or in English from our web page: »www.wif. ethz.ch/publikationen.htm. ance decisions. Each investment and insurance decision incorporated a choice between a risky lottery and a certain payoff. With the series of choices implemented in the two frames we elicited our subjects’ certainty equivalents for the same four risky lotteries (L1, L2, L3, L4) in both contexts. We implemented two frames in the context treatment in order to measure the risk propensity of subjects toward both perceived gains and perceived losses. In both frames, all possible payoffs for each decision were positive. In the investment frame these payoffs were also presented as gains, while in the insurance frame the same payoffs were presented as losses relative to an initial endowment. Therefore, elicited certainty equivalents in the investment frame measure subjects’ risk propensities in the gain domain, while certainty equivalents in the insurance frame measure risk propensity in the loss domain. If, in contextual financial decisions, female subjects are generally more risk-averse than men, our results should display, ceteris paribus, lower female certainty equivalents in both the investment and insurance frames. 3 The four lotteries (L1, L2, L3, and L4) each had two possible outcomes. Payoffs in Swiss francs (1 SFr A $0.60) and their probabilities were (30 SFr, /6; 10 SFr, /6) , (30 SFr, /2; 10 SFr, /2) , (30 SFr, /6; 10 SFr, /6) , and (50 SFr, /2; 20 SFr, /2) , respectively. 4 Experimental evidence suggests that individual risk propensity will vary systematically between the gain and loss domain ( Daniel Kahneman and Amos Tversky, 1979). 383 VOL. 89 NO. 2 GENDER AND ECONOMIC TRANSACTIONS / 3y16 my68 Mp 383 Friday Dec 10 08:20 AM LP–AER my68 FIGURE 1. DIFFERENCES IN MEAN CERTAINTY EQUIVALENTS (CE) BETWEEN MALE AND FEMALE SUBJECTS, BY FRAME Note: Certainty equivalents ( and male – female differences) are measured in Swiss francs. In the abstract treatment we confronted a different group of subjects with exactly the same risky decisions as those in the main treatment. However, as mentioned before, all choices in this control treatment were framed as abstract gambling decisions. Again, two frames were implemented. In the gaingambling and loss-gambling frames we measured the risk attitudes of subjects toward gambles in the gain and loss domain, respectively. Subjects in both treatments were told in advance that one of their choices would determine their experimental earnings. Further, all subjects completed a post-experimental questionnaire which yielded information on each subject’s disposable income. This information is necessary to exclude wealth effects due to income differences outside the laboratory as an explanation of gender-specific choice behavior.