This may explain why women earn less on savings than men
A new study shows that the fear of a potential loss in an investment outweighed the potential gain.
It is well known that men are generally more willing to take risks in various fields compared to women. These gender differences can have significant implications, affecting everything from accidents to career choice, income, and salary.
But why are women less willing to take risks than men? A British researcher at the University of Bath School of Management has delved into this question.
The study was published in the British Journal of Psychology.
Women feel more discomfort from a possible decrease in income
Previous research has shown that women have a stronger aversion to risk than men.
In this new study, the researchers examined two psychological factors: overall optimism and aversion to losses.
They used data from over 13,000 participants in a British survey, asking them how potential changes in household income would affect their sense of well-being.
A potential loss of income from one year to the next was less painful for men than for women. Women were more sensitive to the pain that a possible loss would entail than they were eager about the possible gain they might get.
This was independent of income differences between genders.
The joy of winning does not outweigh the risk
Both genders value the prospect of earning more money equally highly.
“This confirms what other research has already suggested, that women have a stronger aversion to risk compared to men. The asymmetry between the joy of gains and the distress of losses is more pronounced in women than in men,” Dag Jørgen Hveem writes to sciencenorway.no.
He is an associate professor at the University of Agder’s Department of Law.
Hveem also has a part-time position at BI Norwegian Business School and has done research on people's investments in savings products.
Fewer female entrepreneurs
“Differences between the sexes in risk taking can explain why women are less likely to be entrepreneurs, are underrepresented in high-paying jobs and upper management, and less likely to invest their wealth in equities markets than men.”
Researcher Chris Dawson, an associate professor in business economics at Bath School of Management, stated this in a press release. He conducted the study.
Men are more optimistic
The participants were also asked about their expectations for their personal finances one year into the future, based on factors they could influence themselves. Men are significantly more optimistic about their prospects than women.
This suggests that men have more confidence in their abilities compared to women, which may make them more willing to take risks.
Given that women are both less optimistic and take possible losses more seriously, it is natural for them to perceive uncertain investments as riskier, according to the researchers.
Over half of the gap in risk aversion between women and men is attributed to women’s higher aversion to losses. Only three per cent is due to women being less financially optimistic than men.
Also, the researchers have controlled for other personality factors, such as openness, neuroticism, and extraversion, in their study, and they differentiated between genders based on the participants’ self-reported biological sex.
Men have more money they can afford to lose
Hveem points out that another factor can partly explain why men are more risk-tolerant than women. And that they have different attitudes towards financial investments.
This might be because men generally have larger fortunes and slightly higher incomes, Hveem comments.
“Men are therefore financially able to take risks with larger amounts. If one invests in sensible financial products, taking risks pays off over time in the form of higher returns – additional gains,” he points out.
This further exacerbates the wealth inequality between genders.
The Røeggen case
In 2000, Ivar P. Røeggen purchased two stock index bonds for a price of NOK 500,000 (approximately 49,000 USD).
He took out a fixed-rate loan of over NOK 520,000 (51,000 USD) with an interest rate of 7.95%. He incurred a loss of NOK 249,000 (24,000 USD).
The Consumer Council (Forbrukerrådet) sued DNB on behalf of Røeggen. The case went all the way to the Supreme Court of Norway, where the small investor won unanimously.
The Consumer Council called the Røeggen ruling a "crushing victory for Norwegian small investors." Røeggen received compensation for his loss of slightly over NOK 230,000 (22,000 USD).
(Source: E24: Røeggen vant (Røeggen won))
Are men more reckless?
However, is being risk-tolerant always beneficial? It depends, according to Hveem. A few years ago, Norwegian banks sold risky and complex investment products.
Nowadays, these risky products are much less of a problem for Norwegian consumers than they were 15 years ago. In 2008, the private monthly finance magazine Dine Penger (Your Money) estimated that Norwegians had lost 1.4 billion USD on such complex products, as reported by E24 in 2021. Loan financing was common, leading to significant issues for people when they incurred losses.
In 2013, Jon Petter Røeggen won a landmark case against Norway’s largest financial services group DNB in the Supreme Court of Norway.
These risky products were usually bought by men – and some women – without sufficient financial expertise, Hveem explains.
Many of these risky investment types were marketed as secure placement options with promising returns, but some actually carried risk without any significant returns due to high costs and an incomprehensible and unfortunate structure, Hveem explains.
Professionals usually choose investment options that have a better balance between risk and expected returns, he believes.
“We must therefore distinguish between sensible, long-term risk-taking and risky investment products. Investing in the latter involves recklessness, not systematic and sensible risk-taking,” Hveem writes.
Translated by Alette Bjordal Gjellesvik.
Dawson, C. Gender differences in optimism, loss aversion and attitudes towards risk, British Journal of Psychology, 2023. DOI: 10.1111/bjop.12668