How Is This Research Useful to Practitioners?
Risk preferences are, to some extent, an innate aspect of personality, but it is widely accepted—and documented by previous researchers—that men are, on average, more risk tolerant than women in a variety of contexts. The authors study the difference between men’s and women’s risk-taking decisions when applied to asset allocation in the financial markets. They explore whether males recommend a significantly riskier allocation, on average, than their female counterparts, which would be consistent with personal allocations, where male students select a significantly riskier portfolio for themselves than female students. If advisers project their own preferences onto client recommendations, it could create a gap between professional recommendations and client preferences (i.e., risk-averse female investors with male advisers will likely be guided toward riskier allocations than they would otherwise select).
Finance education is also associated with higher risk tolerance; it is well known that helping a client understand how investment horizon affects the risk–return trade-off often increases the client’s willingness to shift capital to risky assets. The authors also examine whether investment professionals opt for much riskier allocations than nonprofessionals. In addition, they explore whether professional male and female wealth managers vary their client recommendations by client gender.
The authors find that male graduate business students recommend riskier asset allocations, on average, than their female counterparts, whereas professional male and female wealth managers select similar personal allocations and do not vary their client recommendations by client gender. A challenge for advisers when forming recommendations is to balance their beliefs about what allocation is appropriate for their clients and their clients’ own risk preferences. Within the student and professional groups, the authors find that a person’s personal allocation choice is the strongest predictor of the recommendation he or she provides, suggesting evidence of a “false consensus,” where the adviser assumes that their clients’ preferences are similar to those of their personal preferences.
The results reinforce the notion that advisers overestimate the similarity between their own preferences and those of their clients and indicate that focusing on gender will not improve the efficacy of the client/adviser interaction. Although education often narrows the gap between risk-averse clients and advisers and could result in higher risk and higher average realized returns, the question remains whether an adviser should attempt to increase a client’s risk tolerance.
How Did the Authors Conduct This Research?
The authors issued an identical survey to graduate business students and professional wealth managers at a regional financial services firm. Taking the role of financial adviser, participants were provided with a description of a client, either a single man or a single woman, and prompted to recommend an allocation across two investment options: an essentially risk-free money market fund and a risky balanced fund that invests in several asset classes.
Participants recommended a percentage allocation to each of the two funds as well as one of five predetermined choices that varied the allocation by approximately 25%. They were then asked to assess the client’s risk tolerance and their confidence in their recommendation and to select an allocation for themselves. Students were given an eight-question quiz to assess their financial knowledge, whereas professionals were asked how many years they have worked as an asset manager.
Given gender differences in risk tolerance, one might expect recommended allocations to be affected by the gender of the client and the gender of the adviser. The authors also examine whether women receive allocations with a lower weight to risky assets as well as whether they are more empathetic and understanding of risk-averse asset allocations when allocating to other women. There is a positive relationship between tolerance for risk and likelihood of entrance into the finance industry, so the authors also examine whether finance professionals—male or female—choose a higher allocation to risky assets than students.
Research exploring viewpoints that could be little more than gender myths or feminist fables is eminently practical, particularly given the recent popularity of gender-diversity-based investment approaches. There are still researchers who argue against the “women risk aversion” theory and consider it to be a stereotype, but in general, this laboratory experiment builds on the existing body of knowledge that professional women in financial fields perform more conservatively. Previous research has concluded that male analysts are more likely to issue extreme positive stock recommendations than female analysts and that female managers invest in a more risk-averse way than male managers.
Although women’s perceptions differ from their male counterparts, men’s willingness to take greater risk may reflect little more than greater optimism and overconfidence. Previous researchers have found that environmental situations play a role in women’s behavior. The fact that all advisers sampled in this study work for a single regional financial services firm could make it difficult to separate the firm’s process or culture from the views of the individual advisers.