ESTIMATION AND IMPACT OF GENDER DIFFERENCES IN RISK TOLERANCE

I. INTRODUCTION Are women systematically less risk-tolerant than men? The answer has critical implications for the financial well-being of women (Schubert et al., 1999). For example, corporations may pass women over for promotion if it is believed that they are unable to make risky financial decisions (Johnson and Powell, 1994). Financial advisers, believing that women are less risk tolerant, may recommend conservative portfolios that have lower returns (Wang, 1994). This paper uses a simple model of individual portfolio choice to estimate the distributions of risk tolerance for women and men. Moments of the model are matched to data on Individual Retirement Accounts (IRAs) from the Health and Retirement Study (HRS) to obtain estimates of the distributions' parameters. Under the assumption of constant relative risk aversion (CRRA) utility, results show that the mean risk tolerance is 0.25 for women and 0.28 for men. Economists generally assume that risk aversion, the reciprocal of risk tolerance, falls in the 0-10 range (Jagannathan and Kocherlakota, 1996). The estimates obtained in this paper are consistent with this assumption. The impact of the results is gauged in the context of gender differences in wealth accumulation. Less risk-tolerant individuals are more conservative investors. Conservative investments can lead to low levels of wealth accumulation and may account for the gender gap in wealth (Lyons et al., 2008). Data on older Americans from the HRS show that men have 103% more wealth in their IRAs than do women. (1) The results from this paper show that gender differences in risk tolerance alone would lead to men accumulating 10% more wealth than women. Gender differences in risk tolerance can thus account for nearly 10% of the gap in wealth accumulation. By comparison, gender differences in earnings can account for 51% of the wealth gap. The results have implications for recent economic and policy changes that are making individuals increasingly responsible for their own financial security. Financial security depends greatly on the ability to accumulate adequate retirement wealth (Wolff, 1998). The results suggest that while the difference in risk tolerance does contribute to the gender gap in wealth accumulation, the role of the gender gap in earnings remains a primary concern. II. LITERATURE REVIEW Gender differences in risk tolerance have been observed in responses to survey questions and risk-tolerance instruments. The National Longitudinal Survey of Youth 1979 (NLSY79) and the HRS both include a series of questions about choosing between two jobs, one that pays respondents their current income with certainty and the other that has a 50-50 chance of doubling their income or reducing it by a certain fraction. Analyzing the HRS question, Barsky et al. (1997) found that men tended to be somewhat more risk-tolerant than women. Spivey (2008) corroborated this finding using the NLSY79. Grable and Lytton (1998) and Sung and Hanna (1996) studied the responses to a subjective risk-tolerance question in the Survey of Consumer Finances (SCF) and concluded that women were significantly less risk-tolerant than men. Grable (2000) used a used a 20-item instrument to assess risk tolerance among faculty and staff at a university and also found that women were less risk-tolerant than men. Researchers have also made inferences about women's risk tolerance based on observed wealth accumulation and investment choices. Using SCF data, Jianakoplos and Bernasek (1998) found that as individuals' wealth increased, the proportion of wealth held in risky assets increased for both men and women, but the effect was significantly smaller for single women. They concluded that single women were less risk-tolerant than single men. Dwyer et al. (2002) found that women took less risk than men in their mutual fund investment decisions. However, the impact of gender on risk-taking was reduced significantly when controlling for the investor's financial knowledge. …