March 24th, 2014

Women are less willing to take financial risk. The Great Recession made things worse

“It’s OKAY to be scared. Being scared means you’re about to do something really, really brave.”       ---- Mandy Hale, "The Single Woman: Life, Love, and a Dash of Sass"
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BY JULIA ANDERSON
American President Franklin D. Roosevelt so famously said, "The only thing we have to fear is fear itself," during his first inaugural address in 1933 at the depth of the Great Depression.

The crash had closed banks; put millions out of work and farms in foreclosure. Breadlines were feeding the destitute in most major cities. That dreadful depression experience affected an entire generation including my parents who came of age and married in the 1930s.

How they thought about money, about saving and investing throughout the rest of their lives was shaped by the lessons of the Depression. My parents' motto: Don't spend money you don't have, save and invest for a rainy day and avoid debt.

How will our Great Recession of 2008-2009 and its aftermath affect a new generation?
Fear again is a factor in how our economy will move forward, say economists who study these things. The concern is that those who have experienced a financial trauma (or even those who only know of a financial trauma) become risk-averse.

People are less willing to take a chance on starting a new business, less willing to invest in a start-up enterprise and are even unwilling to put money into stocks.
Why do we care?

"The financial crisis is likely to inhibit them (people) from taking the sort of risks that help propel the economy for decades to come," reports The Economist magazine in its Jan. 25, 2014 issue. ..."studies suggest that the sweep and severity of the recent slumps in America and Europe will scar a wide range of people, not just those who lost money in the markets."

Studies indicate that women already are more likely to be risk-averse than men and are less likely to save, invest or make big career moves to enhance income. This is all bad news for a global economy still recovering from recession.

The Economist cites several studies on the subject of risk aversion:

- "Nature or Nurture: What determines investor behavior? - Michael G. Foster School of Business, University of Washington.
-"Depression Babies: Do Macroeconomic Experiences Affect Risk Taking?" by Ulrike Malmendier and Stefan Nagel.
- "Trust, Risk, and Time Preferences after a natural disaster: Experimental evidence from Thailand," by Alessandra Cassar, Andrew Healy and Carol von Kessler, University of San Francisco, Loyola Marymount University.
- "Time Varying Risk Aversion," by Luigi Guiso, Paola Sapienza and Luigi Zingales.
- "Gender Difference in Risk Behavior: Does nurture matter?  by Alison Booth and Patrick Nolen.

This last study really interested me because it looked at gender differences in risk-taking. The conclusion: "Broadly speaking, those differences may be due to either nurture, nature or some combination of the two. For example, boys are pushed to take risks when participating in competitive sports, whereas girls are often encouraged to remain cautious.

 Thus, the riskier choices made by men could be due to the nurturing received from parents or peers. Likewise, the disinclination of women to take risks could be the result of parental or peer pressure not to do so," said the study.

The study speculates that gender-stereotypes encourage girls and boys to modify their innate preferences. For example, girls were more likely "to choose risky outcomes when assigned to all-girl groups."

Single-sex environments, the researchers said, are likely to modify students’ risk-taking preferences in economically important ways.

The Economist goes on to report that a "growing body of research links a low tolerance of risk to past emotional trauma," even non-financial trauma.

USA Today reinforces the view that investors in general suffer lingering scars from the market meltdown. A recent story said one-third of investors remain wary of stocks despite market gains of nearly 180 percent from the bottom. According to a Wells Fargo Private Bank survey referenced in the story, 21 percent of those responding to the survey said they "don't plan to invest in stocks at all."

"The take-away from the study? "Investors' confidence needs to be rooted in a conviction that they're taking appropriate risks to meet their long-term goals. Without that conviction, emotional investing and reacting to daily news are a road to failure."

I share all this because women are generally less willing to take investment risk during their working lives and end up with less money for retirement. They are less financially literate and more often rely on outsiders to advise them.

Women (and girls) must be encouraged to set long-term personal financial goals so that short-term events don't derail those plans.

Our recent recession and ongoing economic recovery will only reinforce this risk-adverse attitudes at a time when the economy needs risk-takers who have confidence in the future, in business and in their own ability to invest wisely weighing risk vs. reward.
Investors must "stay disciplined, be diversified, avoid action on emotions," said the Wells Fargo survey.

How can women overcome the negative impact of risk aversion? Being aware of it is a good first step.
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For more:
Men Vs. Women: Risk Aversion, click here.
Gender and Economic Transactions, click here
Are Women More Risk-averse Investors?, click here.