Risky Business: How Environment Affects Women's Decision-Making

The concept of risk as a major factor in decision-making has been thoroughly examined since the 2008 financial crisis began. In this week’s WAPPP Seminar, “Risk in the background: How Men and Women Respond,” risk was examined using the lens of gender to better understand the causes and effects of the choices individuals make. Alexandra van Geen, a 2014-2015 WAPPP Fellow and Assistant Professor at Erasmus University's School of Economics in the Netherlands, discussed her research on the effect that gender has on risk-taking in different contexts.

While acknowledging that previous research states women are generally more risk averse than men, Professor van Geen pointed out that this assumption is based on experiments involving isolated risks. Decisions to take risks rarely occur in isolated situations, however, due to the fact that there is both background risk (current risk) and realized risk (past risk) to consider. Instead, van Geen sought to measure the effect that gender has on risk in more realistic decision-making situations.

In a study conducted at Harvard’s Decision Science Laboratory, 160 students split evenly by gender were placed in an experiment where a third party threw a die to determine each student's payoff. To simulate what van Geen refers to as “background risk,” each participant had a 50% chance of receiving either $2 or $30. In addition, there were two fixed sum groups, one that received the low payout of $2 and one that received the high payout of $30, automatically.

Some of van Geen’s findings confirmed what many already understand to be true about gender and risk: as a baseline, women are more risk averse and less risk-seeking than men. However, van Geen found that women take more risks after receiving the fixed sum or with the presence of background risk, i.e. the roll of the dice in the experiment.

This reduction in risk aversion can be explained by women's sensitivity to the income effect, as in, the potential to earn money without risking a loss. In fact, the effect of income and potential income from past wins (via winning in the dice roll) eliminated gender differences in risk-taking altogether. One potential explanation for this is that women are more sensitive to income because of their higher baseline risk aversion. Additionally, men may narrowly frame a decision and not consider past or present risk in the same way that women do.

The income effect does not explain all the behavior around risk, however, van Geen argued. The effects of the experience of winning in and of itself was also examined. Winning produces several outcomes: (1) emotion, (2) subject expectations (i.e. belief an individual will keep winning once they have, or "gambler's fallacy"), and (3) an elevated level of hormones, namely testosterone. This study found that men increased their risk-taking after winning, despite the fact that there was no apparent income effect on men, indicating that it was the experience of winning itself that altered future behavior.

From these experiments, van Geen concluded that women experience an income effect that reduces risk aversion, while men don't experience an income effect at all. This effect is transient, however, and women eventually return to their baseline risk preferences. The presence of background risk also decreases women’s risk aversion but not men’s, which can also be explained by the effects of income and potential income. Lastly, men increase risk-seeking behavior after winning, while there is no effect for women.

Risk can have serious impact on decision-making, which in turn affects policy, van Geen argued, closing with a few potential policy implications of her research. Policy changes could encourage women to make riskier microfinance investments that lead to better outcomes, while behavioral nudges could discourage male day traders from being overconfident and seek too much risk after a win. Understanding how context affects gender's relationship with risk may help us close these micro-gender gaps, which could then chip away at larger inequities.