Women, Risk Aversion, and Money

Women And Risk Aversion

Are women more risk averse than men? If so, why? And how does risk aversion impact female investors? This topic has been on my mind lately, particularly with the latest gyrations of the market.

I also recall someone once commenting they found my thoughts on investing an interesting window into the mind of female investors. Differences in risk-taking and risk-seeking behaviors certainly impact women in a different way than men (on average, of course), so this is a topic I’ve wanted to cover for a while.

So what better way to kick off the weekend than musing about women, risk aversion, and how it impacts our finances?

Women, Risk Aversion, and Money

Risk And Women

Women are generally perceived to be more risk averse than men. But is it a true perception, or just another stereotype?

I found this interesting article from Harvard Business Review that links to a number of studies that have proven men are more inclined to take risks than women. Women are also perceived as taking less risk, and men as taking more, at least partially because of how we define risk.

When we talk about taking risks, many people think purely of financial or physical risks. There are other kinds of risks that people can take, such as standing up for what they believe in, or asking a question in front of a large audience. We tend not to think of such things as activities as “risky”, and so don’t necessarily give mental credit to those activities.

For more interesting discussion on women and risk, check out this YouTube video featuring IBM’s Ginni Rometty on taking risks – especially starting at 1:40.

Gender, Risk and Money

So women take less risk – or at least are perceived to take less risk – in ways that we think of as traditionally “risky”. How does that carry forward into our money? Or does it?

Studies have shown that men are more financially risk tolerant than women – check out this 2017 report from the American Association of Individual Investors (AAII). From the article:

“The results confirmed the findings of previous studies: men, in aggregate, are more risk tolerant than women are. Approximately three-quarters of the men reported having a high risk tolerance (20.3%) or some risk tolerance (56.3%). In contrast, only half of women reported having a high risk tolerance (11.4%) or some risk tolerance (39.6%).”

But why? It appears to come back to income uncertainty. Research from the University of Missouri-Columbia in 2017 shows that women are more likely to experience income uncertainty from year-to-year. This could be because of time out of the workforce to have children, leaving to care for aging parents, or other events that impact their income.

Along with this, women generally have a lower net worth than men. With a lower net worth, and a higher chance of income uncertainty, keeping money in less risky asset classes acts as a buffer against loss of income.

Risk And You – Tolerance Versus Capacity

Your personal ability to take on risk is actually composed of two parts – your tolerance for risk, and your ability (capacity) to take risk.  So women, on average, take less risk because they are less able to take risk. It’s the second part, the ability, that impacts them. Not so much the capacity.

Lets look at each of the factors of ability to take on risk:

Risk Tolerance

This is, generally, how much risk you personally are comfortable taking. How will you feel when the market declines by 10%, 20%, 50%? When are you likely to bail out due to discomfort? What’s your “can’t sleep at night” versus “sleeping soundly” comfort zone? This is your personal tolerance for risk.

Risk Capacity

This is how much risk you can take, regardless of how comfortable you are taking it. A number of factors go into your personal risk capacity. Think of something like age – the amount of risk someone who’s 65 and on the cusp of traditional retirement can take, versus someone who is 30 and plans another 20-30 years in the workforce – is different.

And when you have an uncertain income, or a lower overall net worth, your capacity for risk is reduced. Why? Because you simply can’t take on as much risk as someone with a more stable income, or a higher net worth. You might need your money in the short term. And money you need in the short term should not be in the market.

My Personal Risk Aversion

I consider myself to be relatively risk averse. Not to the point of not investing and keeping all my money in cash or gold or something. I invest a healthy portion of my income into stocks. However, I can easily point to several facts that make me call myself “risk averse”.

As a long-time investor who’s been through two stock market crashes (the dot-bomb and the Great Recession), market movements don’t really bother me. Partly, that’s because I’m well aware of my personal risk tolerance and I choose my asset classes accordingly. Yes, this means I have bonds. I would never be comfortable in 100% stocks.

I have EE bonds and I bonds. Older ones, that actually earn a good interest rate. I invest in short, mid, and long-term bonds. Am I aware of how a rising interest rate environment will impact bond funds? Yes, I sure am. If you’re not, check out this article for a good explanationI’m good with an approach that involves about 20% bonds, and 80% stocks overall.

As I also get closer and closer to being able to pay off the mortgage, I wonder if paying off a 2.75% loan is really the wisest use of money. Intellectually, and mathematically, I know that there’s a high opportunity cost to deploying money in this way. I value security more than I value the extra dollars I could have in my account if I were to invest the money instead.

In my perception, having a good portion of my investable assets in bonds, as well as spending funds paying off the mortgage rather than investing, point to me being more risk averse. Particularly when compared with those invested 100% in stocks, with a huge amount of debt as leverage (using OPM, or Other Peoples Money, to their financial advantage).

So why am I so risk averse? I’ve done a lot of reflection, and decided there are two primary reasons:

  1. The aforementioned times through two significant market crashes. Having written a site about money for two years, I’ve virtually “met” lots of people whose only investing experience is post-2008/2009. I’ll tell you, talking with them about investing is much different than talking with those who have been investors longer. Whenever I talk with someone who has investment experience comparable to mine (20+ years), they are almost always much more conservative. Note that I have not noticed a correlation with age (I’m 38) – people my age with 5-10 years investment experience take much more risk than I do.
  2. The near death of my husband when I was 32. Nothing like a black swan event to make you overly cautious of black swan events. My zeal to be totally debt free is directly connected to this event, since it was juggling paying increased bills on decreased income that started my debt free journey. If you’re interested more in the start of the journey, check out part 1 and part 2 of our story. My overall risk aversion is connected with this too. Ever since, I never trusted that he would bring in an income again and in many ways, our spending is frozen in time on that day.

Neither of these is directly connected with my gender, of course. But through my research, I’ve found that my gender may be directly connected with my reaction to these kinds of events. That HBR article I linked above quoted a study about men and womens reactions to stress. Women are likely to become more risk averse under stress – and really, the two things above are some of the biggest stressors I can think of.

Money Is More Than Math

Money is often portrayed as nothing but numbers – and we’re told that we should act like computers when it comes to our money. Maximize returns, get as much as possible as quickly as possible, deploy leverage to increase our money, you name it.

But money is so much more than math. Money represents the time (or life energy, if you will) that you traded for that money. Money represents security in cases of emergency – whether a medical event, or a job loss, or some other situation.

Having money enables you to have a higher capacity for risk, which can then enable you to earn more money. But not having money lowers your risk capacity. Not having confidence in a stable future income can lower your ability to take on risk.

Only you can decide on your personal risk tolerance, and only you know your risk capacity. So if someone criticizes your strategy, telling you that you could have more if you only did X, Y, or Z, they’re probably right, you could. But that’s not all that matters in the money world.

There’s no prize for reaching the end with the largest possible pile of money.

You can’t put a price tag on peace of mind, the ability to sleep well at night, or on financial security.

I Want To Hear From You!

What’s your opinion on risk? Do you consider yourself risk averse – and if so, why? Did you learn anything new about women and risk? Let me know in the comments! And for more money musings, check out my page.

Money Musings

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5 thoughts on “Women, Risk Aversion, and Money”

  1. I am a woman and I consider myself risk-averse, largely because of stressful episodes/periods in my life. My husband made it through these same periods seemingly as risk-tolerant as he was before. There is definitely a gender dimension to how we react to life events.

    Related to the attitude towards money and investments in the future, again and again it has been shown in international development (think micro finance, etc) that women are more likely to use funds they earn or are given in long-term pursuits- paying for their children’s education, buying more equipment to expand their business, etc.

  2. My husband is more risk adverse then me though we are both risk adverse. We are paying down our mortgage faster than scheduled. It is not a math decision it is a behavioral one. It is always better to only take as much risk as you can tolerate rather than too much and then make things worse with fear induced action.

  3. Fascinating post Liz. A quick question: the AAII report you for seems to highlight self-reported distinction in risk tolerance. Like Lake Woebegone, where all the children are above average, self reporting can diverge from reality. Are your aware of any data that demonstrate this in a population other than executives, something that might reflect the average investor?

    Appreciate your insights as always,


  4. My husband is a perfectionist and much more risk averse than me. He is upset if he didn’t buy a stock at the very bottom, or if it went up at all after being sold. I manage our stock accounts now. I just buy more when the market is down, and sell to rebalance our portfolio, or if a certain stock is up and I’ve lost my confidence in the company long-term. He used to be the “pay down the mortgage” guy, while I liked OPM, but now that we have had a few real estate investments not really grow, I’ve jumped on that wagon with him. Your bad experiences do affect you. I’m loving your articles on this blog–thanks so much!

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