Cross-Cultural Differences in Risk Tolerance: A Comparison between Chinese and Americans

The purpose of this study is to compare risk-taking attitudes and behavior between Chinese and Americans. Such an investigation has both theoretical and practical importance. Theoretically, this research can help determine whether the existing research results on risk tolerance, which are predominantly generated using U.S. data, are valid in the context of another culture. Practically, the findings of this study can provide knowledge about similarities and differences in risk tolerance between Americans and Chinese. Such knowledge may be useful to American entrepreneurs doing business in China in an era of increasing economic globalization, and to American businesses and professionals working with clients who have a Chinese heritage. In light of the available evidence in the literature, we test the following hypotheses regarding country differences in risk tolerance between Chinese and Americans: H1 - Chinese are more risk tolerant than Americans in financial risk-taking attitudes; H2 - Chinese are more risk tolerant in their financial risk-taking behavior; H3 - There is no difference between Chinese and Americans in how socio-demographic characteristics affect their financial risk-taking attitudes; H4 - There is no difference between Chinese and Americans in how socio-demographic characteristics affect their financial risk-taking behavior. The Chinese data were collected in 1998 from workers in Guangzhou, a major city and capital of Guangdong province in Southern China. A quota matrix of gender, age, and enterprise ownership was developed for this survey. For this study, we excluded observations that have missing values in the variables needed in the multivariate analyses. The final sample size used in this study is 470 Chinese individuals. Compared to national representative statistics, our sample over-represents workers from foreign-, joint-, and private-owned companies and those with higher educational levels. As these characteristics may relate to risk tolerance, caution is exercised in interpreting the findings in later sections. The American data were collected in 1998 by the National Opinion Research Center at University of Chicago and sponsored by the U. S. Federal Reserve Board. This data set is one of the triennial surveys. The original data set has 4,309 observations. To make the sample comparable with the Chinese data, we selected only full time workers who were not in the farming, forestry or fishing industries at the survey time. The final sample size used in this study is 2,671. The two dependent variables examined are risk-taking attitudes and risk-taking behavior. Risk-taking attitudes are measured by a categorical variable with four levels: (1) take substantial financial risks expecting to earn substantial returns; (2) take above average financial risks expecting to earn above average returns; (3) take average financial risks expecting to earn average returns; and (4) not willing to take any financial risks. Risk-taking behavior is measured by stock ownership. This variable has two attributes: owning stock or not. Chi-square tests were first conducted to test if there are associations between risk-taking attitudes and the country variable, and between stock ownership and the country variable. Logistic regressions were then performed to verify if the differences still exist when demographic variables were controlled. For the risk-taking attitudes models, unordered multinomial Logistic regression was used because there are four levels of risk-taking attitudes, and because the assumption of proportional odds was rejected. Binomial Logistic regression was used for the stock ownership models as there are only two attributes for this dependent variable. Our findings show that Chinese in our sample are more risk tolerant than Americans in their financial decisions, both in attitudes and behavior, a result in line with Weber and Hsee's (1998) cushion theory and their empirical findings. Alternative explanations such as a lack of knowledge about the relationship between risk and return among the current generation Chinese are also explored. Reference