Charts of the day, female risk-aversion edition

By Felix Salmon
February 24, 2014
Catha Mullen of Personal Capital, an online wealth-management company, has an intriguing post about what she calls “gender bias in investing”.

" data-share-img="" data-share="twitter,facebook,linkedin,reddit,google" data-share-count="true">

Catha Mullen of Personal Capital, an online wealth-management company, has an intriguing post about what she calls “gender bias in investing”. Looking at the Personal Capital user base, she found that “women are on average 7% more risk-averse than men”, and that “the effect of gender on risk tolerance is greater than that of any other variable” — bigger even than net worth.

Because Mullen’s multivariate analysis table is quite hard to read, I asked her to generate a couple of histograms for me. Here are the results:

age.png

networth2.png

In both cases, risk tolerance is based on Personal Capital’s five-point scale, which runs from 1 (“Market volatility makes me very uncomfortable. Safety is a much higher priority than growth for me, and I do not expect growth meaningfully above inflation”) to 5 (“I am willing to take a high degree of risk in pursuit of higher returns, and am very comfortable with the volatility of a 100% stock portfolio”). I’ve also stripped out the data for people with net worth over $5 million, since the dataset there seemed to comprise one man and zero women.

Overall, calculates Mullen, women will end up with roughly 10% less money at retirement, thanks to their higher risk aversion. Maybe that explains why Warren Buffett, in his will, isn’t giving his wife cash, but instead is setting up a trust for her which is 90% invested in stocks. But I don’t think that Mullen’s findings counteract the generally-accepted fact that women are better investors than men.

The biggest story in these charts can be found at the far left, among the young and the relatively impecunious. If you’re a woman between the ages of 18 and 30, or if you’re a woman with a net worth of less than $100,000, then you’re a lot more risk-averse than a man in the same position.

This risk-aversion could well be entirely sensible. If you’re just saving for retirement, then it makes sense for younger and poorer people to maximize their risk appetite: you have relatively little to lose, while a nice gain early on can give you an unbeatable headstart later in life. But the fact is that most of these people are probably not saving for retirement: they have more urgent expenses to deal with first, like the costs involved in buying a house or raising a young family. In that case, it makes sense to be relatively risk-averse.

It’s also interesting that the richer men get, the closer they get to how a similarly-situated woman would invest. You’d think that risk tolerance would rise with net worth, but in fact it doesn’t: once you have a decent nest egg, it turns out, you start concentrating more on how to keep it and less on how to grow it. That’s one reason why Suze Orman puts nearly all of her money into wrapped and triple-A rated zero-coupon municipal bonds. She can live extremely well on what she already has, so the most important thing is to retain that wealth, rather than bear any risk that it’s going to disappear. (Interestingly, Nassim Taleb has a very similar investment portfolio, although he takes a lot more risk with the 10% of his money which he puts at risk.)

In general, people filling out investment questionnaires tend to overestimate their own risk appetites — which implies that men are taking too much risk, and that they’d be better off behaving more like women. A good investment advisor knows to invest her clients’ money more cautiously than they say they want; the lesson of Mullen’s data is probably that she should bring the risk down more for men than she should for women.

Comments
6 comments so far

Felix, thanks for your interest in our study and your thoughtful review of the data!

I also wonder if the gender gap is greater for younger generations because financial acumen is likely lower. Studies (like this one: http://www.cer.ethz.ch/research/wp_02_23 _paper.pdf) have shown that with “perceived competence” (i.e., get smarter), women take more risk, whereas men take less.

While we don’t measure competence for Personal Capital users, I don’t think it’s an implausible read of the data! And it suggests the need for better financial education. That’s why I’m so excited to be working at a company that empowers people to understand their finances :)

Posted by cathamullen | Report as abusive

Fun though it might be to speculate wildly about how “women invest like THIS, men invest like THIS,” the second chart above strongly suggests (does it not) that this is purely down to women earning less than men. Notice how the supposed female characteristic of conservative investment fades steadily away at the top income ranges?

Strong indicator that in the lowest ranges, where retirement savings competes with food, rent, and childrens’ education , women disproportionately make up the lower more vulnerable end of the spectrum. (I mean, we know that anyway, don’t we? Or shouldn’t we?)

Posted by RyanTate | Report as abusive

Confirms for me why women “marry ‘up.’”

‘Nuff said, Hillary!

Posted by Twinkbait | Report as abusive

“women will end up with roughly 10% less money at retirement, thanks to their higher risk aversion”

That could easily mean that women are more likely to hit their retirement goals. Maximizing expected return should NOT be the metric of investing for retirement. Meeting income needs should be. (Which is why I’m puzzled by Felix’ insistence that investing choices should be focused on “matching or beating market indexes”.)

“You’d think that risk tolerance would rise with net worth, but in fact it doesn’t”

Arguably true, but remember that we are looking at a multi-factor picture. You’ll find far more $1M portfolios among those 50+ than among those in their 20s and 30s. Clear case of confounding.

I do find it interesting that the male/female difference converges to the right, as the individual ages and the wealth rises.

Posted by TFF17 | Report as abusive

Hmmm. A dimensionless number pulled from a survey explain by a regression whose r-squared is at best 14%.

Posted by Th.M | Report as abusive

Felix, you’re not making much sense here:
“…the fact is that most of these people are probably not saving for retirement: they have more urgent expenses to deal with first..”: what does this have to do with gender differences, unless you think that women have disproportionately more urgent expenses? And if you do, you should at least write one sentence explaining why you think so.

Nor here:
“…people filling out investment questionnaires tend to overestimate their own risk appetites — which implies that men are taking too much risk, and that they’d be better off behaving more like women…”: again, on what basis are you asserting that men are more likely to overestimate their risk appetite than women?

Posted by niveditas | Report as abusive
Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/