Risk awareness and the stock market
One major challenge facing stock exchanges around the world is the lack of female investors. There is a definite preference for women to choose lower risk wealth growth options like term deposits or bonds over stocks, but why? One of the reasons is that the financial services industry hasn’t done a good job of talking to women about risk.
A 2014 study by the Melbourne Institute of Applied Economics found almost 60 percent of females were unprepared to take any financial risk, compared with around 40 percent of males.
Risk aware, not risk averse
When it comes to money, women are inherently more risk aware than men. I say risk aware rather than risk averse because the difference lies not in being afraid of risk, but of not being educated in using risk to your advantage.
From a young age, girls are taught to avoid risk. It was true for me, and may be true for many others that parents are often more likely to reward boys for accomplishments or risk-taking while urging girls to be cautious.
Demystifying risk to someone who has been told her whole life to “be careful” is no easy task, and the financial services industry’s lack of diversity is a problem.
Advice doesn’t meet women’s needs
In Australia, only one in five financial advisors is female. Women are twice as likely as men to first seek advice from a financial advisor. However, a 2016 study from the Royal Melbourne Institute of Technology (RMIT) found there was a lack of appropriate financial advice providers that women felt comfortable with.
Research has shown that when women do consult an advisor, the advice comes more in the form of a sales pitch rather than a mutual conversation. They also feel pushed into riskier investments that they are not comfortable with. Advice needs to be relationship focussed rather than transactionally focussed.
I don’t know about you, but if I’m going to buy shares in a company with my hard earned money, I want to understand the risks involved. I believe this is true for all investors, but more keenly so for women.
Differences in risk awareness could be attributed to the distinct ways males and female process information. A 2012 questionnaire for the Journal of Advanced Research in Management found males are highly selective in the way they process information and emphasise the upside of expected return. In contrast, women work through financial information comprehensively and are more concerned with the downside risk.
But times are changing. Women are having much more involvement in financial decision-making in households which is linked to their increasing financial education levels and earning power. This leads to improved financial literacy and understanding of risk.
If female consumers can be talked through their options, and the outcomes clearly articulated, they are more likely to accept risk, and the gender gap in equity markets will narrow.