Gender differences in financial risk tolerance

The purpose of this research is to explore gender differences in financial risk tolerance using a large, nationally representative dataset, the Survey of Consumer Finances. The impact of the explanatory variables in the model is allowed to differ between men and women to decompose gender differences in financial risk tolerance. The results indicate that gender differences in financial risk tolerance are explained by gender differences in the individual determinants of financial risk tolerance, and that the disparity does not result from gender in and of itself. The individual variables that moderate the relationship between gender and high risk tolerance are income uncertainty and net worth, with income uncertainty moderating the relationship between gender and some risk tolerance. Financial fiduciaries should understand the differences in income uncertainty and net worth between men and women and how those differences relate to risk tolerance.     

Childhood exposure to the Second World War and financial risk taking in adult life

Adverse childhood experiences might have long-lasting effects on decisions under uncertainty in adult life. Merging the European Survey on Health, Ageing and Retirement with data on conflict events during the Second World War, and relying on region-by-cohort variation in war exposure, we show that warfare exposure during childhood is associated with lower financial risk taking in later life. Individuals who experienced war episodes as children hold less – and are less likely to hold – stocks, but are more likely to hold life insurance, compared to non-exposed individuals. Effects are robust to the inclusion of potential mediating factors, and are tested for nonlinearity and heterogeneity. Moreover, we provide evidence of hedonic adaptation to war, as high and low intensity of war exposure have comparable long-term effects. We also document that war exposure in childhood increases sensitivity to financial uncertainty since exposed-to-war individuals are less likely to hold stocks after periods of high volatility. Finally, we shed light on the most likely mechanism in the relationship between war exposure and financial risk taking – i.e., enhanced sensitivity to uncertainty – and we show that preferences, and not beliefs, channel this relationship.     

The benefits of joint and separate financial management of couples

Financial management differs across households with consequences for financial outcomes and well-being of partners in households. A large-sample study has been performed, investigating the relationship between financial management of households and the occurrence of financial problems. To our knowledge, this is the first study on this relationship. Data from both partners was collected on having joint and separate bank accounts, on financial decision making, on drivers of financial management, and on financial outcomes. Based on the data, four financial management styles were derived: syncratic/joint, male-dominant, female-dominant, and autonomous financial management. In the syncratic style, partners have a joint bank account and take most financial decisions together. In the male/female-dominant styles, one partner (husband or wife) takes the main financial decisions. In the autonomous style, both partners have their own bank accounts and make their own decisions. As a conclusion, we find that syncratic financial management and having a joint instead of a separate bank account correlates with fewer financial problems, as compared with male-dominant money management and having separate bank accounts. Deciding together as partners is beneficial for the quality of financial management and for avoiding financial problems.     

Rational and behavioural predictors of pre-retirement cash-outs

Given the worldwide concern that individuals are not saving sufficiently for retirement, many governments are taking action to try and rectify this tendency. A key focus area is implementing policies to dissuade individuals from accessing accumulated retirement funds when changing jobs. While traditional economic theories assume that individuals act rationally and make optimal decisions without outside intervention, current policy interventions support behavioural theories of decision-making where sub-optimal choices occur due to limitations in human decision-making. Therefore, interventions are based on the assumption that individuals act irrationally. Despite these interventions, many individuals still access their funds suggesting that current interventions may not be sufficiently aligned with the factors influencing decision making in this environment.The main research objective of this study was to test empirically both rational and behavioural factors that could potentially influence retirement preservation decisions, to determine which factors were the best predictors of whether an individual preserved funds when changing jobs. A research instrument was designed using a combination of existing psychometric measures and customised questions to form an analytical survey. This was used to test the factors that predicted the preservation decisions of a sample of 256 academic and non-academic personnel at a tertiary education institution in South Africa.The study found that behavioural factors play an important role in predicting preservation decisions. In particular, behavioural factors related to bounded rationality, due to the computational complexity of the decision-making environment, emerged as important explanatory variables, indicating that interventions such as decision support and guidance may assist individuals in making optimal decisions.     

The arithmetic of outcome editing in financial and social domains

Outcome editing refers to a set of mental rules that people apply when deciding whether to evaluate multiple outcomes jointly or separately, which subsequently affects choice. In a large-scale online survey (n = 2062) we investigate whether individuals use the same outcome editing rules for financial outcomes (e.g., a lottery win) and social outcomes (e.g., a party with friends). We also test the role of numeric ability in explaining outcome editing. Our results show that people’s preferences for combining or separating events depend on whether those events are in the financial or the social domain. Specifically, individuals were more likely to segregate social outcomes than monetary outcomes, except for when all outcomes were negative. Moreover, numeric ability was associated with preferences for outcome editing in the financial domain but not in the social domain. Our findings extend the understanding of the arithmetic operations underlying outcome editing and suggest that people rely more on calculations when making choices involving multiple financial outcomes and more on feelings when making choices involving social outcomes.     

Self-control and financial risk taking

We report two studies investigating the role of self-control in risky financial decision-making, operationalized as incentivized lottery task decisions. Study 1 (N = 529) investigated the link between propensity to take financial risks and trait self-control. Study 2 (N = 321) examined whether reflecting on one’s prior successes and failures in exercising self-control has an impact on subsequent risky financial decision-making. Study 1 identified a negative link between self-control and financial risk-taking, and Study 2 found that reflecting on self-control successes lowered people’s propensity to take financial risks, while reflecting on self-control failures made people more prone to take financial risks.     

Impact of inflated perceptions of financial literacy on financial decision making

We examine whether inflated perceptions of financial literacy affect financial decision making. Gaps between objective financial literacy and self-reported (perceived) financial literacy (blind spots) predict 19 financial behaviors better than age, gender, income, ethnicity, marital status, self-employment status, and general education levels. Only two predictors, perceived financial literacy and financial education, carried similar levels of predictive power on financial behaviors. Those with inflated perceptions of financial literacy are more likely to miss mortgage payments, receive a collection call, use informal debt, and have poor banking behavior. Those without blind spots make better financial decisions. The differences between those with and without blind spots are more pronounced among individuals with higher education and income.     

Cognitive dissonance, pessimism, and behavioral spillover effects

A two-stage experiment was designed to examine spillover effects of a type of optimism/pessimism. We first exploit cognitive dissonance to induce optimism/pessimism by random assignment of high/low piece rates for performing a task. Subjects receiving the low piece rate are significantly more pessimistic with respect to performance. In Stage 2 individuals participate in an ultimatum game. Pessimistic subjects have significantly lower minimum acceptable offers, though pessimism was randomly generated in an unrelated environment. These results reveal behaviorally and economically important spillover effects - for example, pessimism regarding one’s initial conditions (e.g., living in poverty) may have spillover effects on one’s future labor market outcomes.     

Development and validation of the Perceived Investment Value (PIV) scale

This study aims to develop a complementary and more comprehensive measurement to assess the nature of investment value affecting consumers’ investment behavior. Recent research suggests that consumers may desire and obtain certain outcomes from investments that have not been anticipated in mainstream finance and economics literature. These benefits might be hedonistic or altruistic, self-expressive or emotional and experiential. Yet, while an increasing amount of attention has been paid to this topic, little effort has been made to develop an appropriate measurement scale for the subjective consumer perceptions of investments. To address this gap in the literature, this study introduces the concept of Perceived Investment Value (PIV), and develops and validates a measurement scale for the concept. The ultimate 18-item PIV scale parsimoniously represents six Perceived Investment Value dimensions: Economic value—Monetary savings; Economic value—Efficiency; Functional value—Convenience; Emotional value—Emotions and Experiences; Symbolic value—Altruism; and Symbolic value—Esteem. The final measurement scale demonstrates acceptable reliability and validity. Implications related to the developed scale are discussed in terms of their potential to inform a future research agenda.     

Sources of information and portfolio allocation

This research investigates the relationship between how a household receives financial information and the degree to which investment portfolios are diversified. Diversification is measured as allocation across asset classes and share of assets held in each asset class. Propensity score-based techniques incorporating stratification and weighting are employed to better isolate causal links, while also controlling for objective and subjective financial literacy and overconfidence. Results indicate that the use of financial planners and brokers is associated with an increase in asset class diversification. Households that consult with financial planners and bankers allocate their wealth systematically different from those who do not. These results highlight the role that financial professionals play in helping households make investment decisions.     

Consumer fraud victimization and financial well-being

Using US household panel data, we provide evidence of a strong negative association between consumer fraud victimization and individuals’ perception of their financial well-being. We show that this effect is homogenous among the population and mainly stems from victimization through misrepresentation of information as well as misusage of money by third parties. We disentangle two potential channels through which victimization might reduce perceived financial well-being: psychological consequences (loss of confidence in financial matters) and economic consequences (decrease in net wealth). Our results show that fraud is more negatively associated with a loss in individuals’ confidence in financial matters than with declines in their net worth. Our findings suggest that people tend to doubt their abilities to handle financial matters after having fallen prey to fraud, which in turn carries major implications for subsequent financial decision making.     

On the behavioural relevance of optional and mandatory impure public goods

Impure public goods combine a private good with a public good. Often, impure public goods have a charitable or ethical dimension, giving ethically motivated consumers a convenient option to contribute to public goods through the marketplace (in addition to direct donations). Impure public goods could potentially promote ethical giving or alternatively hinder charitable behaviour. We implement an economics experiment with a between-subject design to test the behavioural relevance of impure public goods with only a token (i.e. small) contribution to a public good. Contributions to the public good are negatively affected by the presence of impure public goods with token contributions. We explore one mechanism to offset this negative impact by making the token impure public good mandatory. We observe higher average contributions and several positive impacts on charitable behaviour, which supports the claim that this mechanism can potentially offset the negative impact of impure public goods.     

Parenthood,risk attitudes and risky behavior

This study analyzes how risk attitudes change when individuals experience the major life event of becoming a parent by using longitudinal data for a large and representative sample of individuals from Germany. The analysis uses a survey-based measure of risk aversion. The estimation is based on an individual fixed effects model similar to an event study. On average, men and women experience a considerable increase in risk aversion around the time of first childbirth. This increase already starts as early as two years before they become parents, it is largest shortly after childbirth and it disappears when the child becomes older. When analyzing risky choices, the results indicate that risky labor market behavior remains unaffected by parenthood.     

Household finances and well-being in Australia: An empirical analysis of comparison effects

This paper explores the importance of the household’s financial position for an individual’s level of well-being. Initially, the empirical analysis, based on the Household, Income and Labour Dynamics in Australia (HILDA) Survey, a large nationally representative panel survey, aims to ascertain the impact of the household’s monetary financial position on overall life satisfaction and financial well-being, with the latter being measured by financial satisfaction and subjective prosperity. The empirical analysis confirms that the household’s level of net wealth, assets and debt are important determinants of overall life satisfaction and financial well-being. The paper goes on to explore whether the financial situation of households in a comparison group influences an individual’s overall life satisfaction and financial well-being. The results suggest that the financial position of households in the comparison group is an important determinant of an individual’s level of overall life satisfaction and financial well-being, with information effects generally dominating comparison effects. In addition, the effects of the comparison group are asymmetric depending on whether a household’s financial position is above or below the average of the reference group.