Why Women Don't Take Risks With Their Money

Because women make less than men, not because they're biologically risk-averse

Stephen Hird/Reuters

Read almost any article about personal finance for women and you will find variations on the idea that the ladies find investing scary, intimidating and fail to appreciate the need to take chances to maximize their potential monetary gains. Think of it as "Men are from the Stock Market, Women are From the Passport Savings Account" view of life.

Take, for example, this snippet from Prudential Financial's recent survey "Financial Experience and Behaviors Among Women." Women, the study proclaims, "focus on the family, but their risk aversion may be putting their families' financial health at risk." A solid majority of women, the report adds, "see themselves as savers rather than investors."

Sounds like an intriguing finding. But how, then, to account for the fact that Prudential's own research found a majority of men—though not quite as many as women—also see themselves as savers rather than investors?

According to Julie Nelson, the chair of the economics department at the University of Massachusetts, Boston, the idea that men are more risk-taking and women are more conservative is pervasive, and one of the reasons more than a few people believe the financial crisis could have been avoided if only more women were in charge at Wall Street banks. "The background belief is so strong, that people don't question it," Nelson said.

Nelson released a working paper reviewing two-dozen papers purporting to demonstrate that women were much less likely to take a financial or gambling risk than their male counterparts. Her analysis revealed that most of the published research did not demonstrate what it purported to show. Instead, the authors of the studies evaluated by Nelson made much hay out of small differences between the sexes in their attitudes towards taking chances, while ignoring or downplaying much more common overlaps between them.

There are real consequences to insisting women lack the ability to take on risk like the big boys. This faux belief allows makes it possible to downplay the number-one reason women truly have less money in the bank or their 401(k)s than their male counterparts. It's not because they view themselves as savers rather than investors. It's because they live economically more precarious lives than men.

You can't separate economic status from risk tolerance. Look at the study "Gender Differences in the Investment Decision Making Process," published more than a decade ago. High-earning women, in the view of authors Lori Embrey and Jonathan Fox, were more likely than other women to put their money in the stock market. The issue was that women were less likely than men to be high earners in the first place.

More recently, Mariko Chang found the same thing when she quizzed men and women about their savings and investment habits for her book Shortchanged: Why Women Have Less Wealth and What Can Be Done About It. The men she interviewed were more willing to take risk than women, not because they were men, but because they have more faith in their ability to make up any investment losses through their future earnings than the opposite sex did.

In fact, when the subject is changed from sex to economic justice, this sort of thinking is the conventional wisdom. When the Consumer Federation of America and financial giant Primerica surveyed people about their investing habits earlier this year, they discovered that one in five people earning between $30,000 and $100,000 annually would put money in stocks and bonds if they suddenly found themselves in possession of $1 million. The number for those earning more than $100,000: just under half.

CFA head Steve Brobeck had no question about the cause of such a discrepancy.

"The principal reason that occurs to me for the difference in risk tolerance is that upper-income people can better afford to lose money," he said in at the press conference held to discuss the survey. "Middle-income people are getting closer to the edge financially, so it's a rational decision on their part not to invest heavily in an option that could cost them a great deal of money, even though there's a possibility of relatively high yields."

So that idea that Lehman Brothers would still exist if only it were called Lehman Sisters? Maybe there is something to it, but not because females running the place would lack the testosterone needed to leverage the place into the ground. No, they would still be with us because they were managing their money more carefully than the male-run firms. They wouldn't have a choice. When it comes to the financial services sector, women earn between 55 and 62 cents for every dollar brought home by their male counterparts.