Gender Differences in Personal Income and Financial Risk Tolerance: How Much of a Connection?

Prior research indicates that relative to men, women generally have lower incomes and typically are more risk averse. In a sample of the clientele of financial planners, men had higher personal incomes and exhibited greater financial risk tolerance, which is consistent with previous studies. The authors' objective was to determine how much of the gender difference in income could be explained by risk tolerance. Results indicate that risk tolerance can explain some of the variation in earnings between women and men but that it is not a primary reason for the wage gap. Risk exists in any decision in which an outcome is not fully guaranteed (i.e., 100% probable). Risk tolerance is the extent of one's willingness to pursue an uncertain course of action, offering a relatively large reward, over a more certain course of action, offering a relatively small reward (March & Shapira, 1987). In everyday language, risk tolerance is the willingness to "take a chance." Generally, taking a greater chance holds out the promise of a greater reward, but it is accompanied by a correspondingly higher possibility of losing what is at stake. Various lines of research indicate that risk tolerance is a factor in the amount of remuneration an individual receives from her or his work (Bonin, Dohmen, Falk, Huffman, & Sunde, 2006; Brown, Farrell, Harris, & Sessions, 2006; Dohmen et al., 2005; Douglas & Shepherd, 2002; Graham, Cron, Gily, & Slocum, 2007; MacCrimmon & Wherung, 1990; Shaw, 1996). It is well documented that women earn less than men (Boheim, Hofer, & Zulehner, 2005; Hartmann, Sorokina, & Williams, 2006); however, the causes of the wage gap are still hotly debated. The discrepancy has been attributed to differences in type of jobs, levels of education, college majors, and work experience. A significant portion of the gap, however, cannot be explained by these factors and could represent either an undervaluation of women's skills or outright discrimination (Boheim et al., 2005; Hounsell, Humphlett, & Lewis, 2002). A gender difference favoring men on risk tolerance is also fairly well established (see meta-analysis by Byrnes, Miller, & Schaefer, 1999). Some researchers have implied that risk tolerance may account for some of the observed difference in incomes between men and women. For instance, Dohmen et al. (2005) reported that in Germany, approximately 33% of women work in the public sector compared with 21% of men, perhaps because the public sector jobs offer more job security, even though the pay is lower. A more direct test of risk tolerance as a possible cause for the gender difference in wages was conducted by Dohmen and Falk (2006), who found that risk-averse workers preferred fixed payments (safe payoff), whereas risk- tolerant workers preferred variable pay (uncertain payoff). Even after controlling for productivity, Dohmen and Falk observed a marked gender difference in this preference. Overall, variable pay was preferred by 68% of the men and 44% of the women, with a difference in the same direction existing in all four productivity brackets. On a probit analysis, women were 24% less likely than men to elect a variable pay scheme when productivity was not controlled, and 15% less so after adjusting for productivity differences. Dohmen and Falk's (2006) findings are intriguing but not definitive. Their results were based on two measures of risk tolerance: (a) choices involving a lottery with safe versus risky options and (b) a self-rating on an 11-point scale about "willingness to take risks, in general1' (p. 10). The chief limitation in the Dohmen and Falk study is the method used to assess risk tolerance. On lottery questions, the results are often a function of die payoff options and response modes (Schoemaker, 1990), so answers to a single question may not be sufficient to assess a person's typical risk tolerance. Also, the reliability of single-item scales is generally lower than a sum score composed of multiple items, and, whenever possible, a summated scale is preferable (Nunnally & Bernstein, 1994). …