Research by Cass Business School and the University of Bristol has shown that men are more likely to take financial risks than women, and that younger and older people are more risk averse than those in middle age.
The findings of its ‘Quantifying Loss Aversion: Evidence from a UK Population Survey’ also included:
- Single people may accept more risk than those in a relationship; and widowed, divorced and separated people were less likely to take risks than those in a relationship
- Individuals with children are more risk averse than those without children
- People with a limited grasp of financial matters are more risk adverse than those who have a better knowledge
- People in poor health are also particularly risk averse
It may have been expected that individuals in social class A – higher professional and managerial occupations – would be less risk averse than social class E – never worked and long-term unemployed – but the researchers found that individuals in social class B – lower managerial and professional occupations – were more risk averse than expected. Respondents from class B were, on the whole, more risk averse than class C – supervisory or clerical and junior managerial, administrative or professional; and skilled manual – and class D – semi and unskilled manual workers.
Readers of the Financial Times, Times and Telegraph newspapers are the least risk averse, but readers of the Guardian were found to be the most risk averse, ranking ahead of readers of the major tabloids in this respect.
The researchers commissioned YouGov to survey 4,000 UK adults, with the participants selected to provide a representative spread of gender, age class, marital status, class, education, personality types, financial understanding and income.
Professor David Blake, a co-author of the report and Director of the Pensions Institute at Cass, suggested that the UK’s financial advisers could use the results of the survey in a number of ways. For example, he believes that one of the reasons women often have smaller pension pots than men is that they have kept their retirement savings in low risk vehicles which offer limited growth potential, and that individuals from some of the more risk averse groups may need to be prevented from making poor investment decisions. Conversely, he suggested advisers may sometimes need to temper the natural instincts of their clients who want to invest in high risk areas.
Prof. Blake said:
“Advisers can also use the fact find to design nudges to improve their clients’ welfare by moving them away from poor investment decisions that reflect their behavioural biases. For example, women, because they are more risk-averse than men, would be more comfortable with lower-risk investments. Over a long investment horizon, such as that involved in building up a pension pot, this behaviour has been described as ‘reckless conservatism’ – women with the same salary history as men would, on average, have lower pensions as a result.
“To avoid this, ways may need to be found of nudging women away from their comfort zone. One common way to do this is to have a gender-neutral default investment fund that involves a more aggressive investment strategy at young ages than women would normally choose. The same strategy would apply to young people who are also extremely risk averse.
“On the other hand, men’s investment overconfidence can lead to ‘reckless adventurism’. This is not necessarily desirable at older ages close to retirement, since there is less time to recover from a severe fall in stock markets. To avoid this, ways need to be found of guiding men away from this type of behaviour. Again, one way to do this is to design a gender-neutral default investment fund to involve a less aggressive investment strategy at older ages than men may otherwise choose.
“There are also clear benefits from improved financial understanding. Risk and relative loss aversion are lower as is the willingness to take risks when facing losses the greater is an individual’s level of financial understanding.”
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