Young adults’ subjective and objective risk attitude in financial decision making

Abstract

Purpose The purpose of this paper is to derive the determinants of young adults’ subjective and objective risk attitude in theoretical and real-world financial decisions. Furthermore, a comparison of the factors that influence young adults’ and older adults’ risk attitude is provided. Design/methodology/approach The paper relies on an experimental setting and a cross-sectional field study using data of the German central bank’s (Deutsche Bundesbank) PHF-Survey. Findings Young adults’ objective risk aversion is not constant but increases with stake sizes. Furthermore, young adults’ subjective risk attitude is a better predictor for their objective risk attitude than a set of commonly employed socio-demographics and economics like age or income. Moreover, young adults’ subjective risk attitude works as a mediator for the influence of their investable financial wealth on their objective risk attitude. Although young adults’ subjective risk attitude shows a gender effect, the influence of young adults’ gender on their objective risk attitude decreases with higher stake sizes. Compared to older adults, young adults generally show a similar degree of subjective risk aversion. However, due to stronger financial restrictions, young adults show a higher degree of objective risk aversion. Originality/value Although individuals’ financial outcomes depend on the financial behavior established in young adulthood, there is no study that simultaneously analyzes the determinants of young adults’ subjective and objective risk attitude in real-world financial decisions with a focus on young adults as a separate age group. The paper closes this gap in literature and additionally provides a comparison of the subsamples of young adults and older adults. The analysis in this paper reveals that young adults’ lower engagement in financial markets is primarily driven by their tight budget and not by a fundamental different subjective risk attitude.

Young Adults and Their Finances: An International Comparative Study on Applied Financial Literacy

“…We observe a similar gender effect for investments with a high risk and return for Canadian, Danish and German students. These results are in line with the findings of Oehler et al (, ), who note that, on average, females show a higher degree of risk aversion in investment decisions than males. However, since we do not observe any statistically significant gender differences for the remaining financial products, we do not think that this effect significantly skews our results.…”

“…We additionally use Wilcoxon tests to check whether our previous results are influenced by gender effects. Since Oehler et al (, ) find that, on average, females show a higher degree of risk aversion in investment decisions than males, we assume that females might own more insurance products than males, while males are more likely to buy investment products.…”

Behavioural portfolio theory revisited: lessons learned from the field

“…Nagel (2008) and Chiappori and Paiella (2011) state that RRA is independent of households' wealth (constant relative risk aversion). Decreasing RRAa larger percentage of wealth invested in risky assets with increasing wealthis found in the studies of Cohn et al (1975), Morin and Suarez (1983), Riley and Chow (1992), Oehler (1998), Calvet and Sodini (2014) and Oehler et al (2018a). Finally, Paya and Wang (2016) point out that they find evidence for different types of RRA in the cross section of one data set, depending on the wealth measure they use.…”

“…6 Their conclusions support former findings that the probability to hold risky assets rises with the educational level (e.g., Campbell, 2006;Cole et al, 2014), that men are more likely to take financial risks than women (e.g., Jianakoplos and Bernasek, 1998;Sund en and Surette, 1998;Barber and Odean, 2001;Croson and Gneezy, 2009;Dohmen et al, 2011), and that older individuals are less likely to invest in risky assets (e.g., Ameriks and Zeldes, 2004;Curcuru et al, 2010). The positive relation between households' directly queried risk attitude and their risk-taking is also observed by Bertraut (1998), Dohmen et al (2011), Halko et al (2012, Guiso and Sodini (2013), Oehler and Horn (2019) and Oehler et al (2018a), providing support that investor's risk-taking is a function of investors' risk attitude (e.g., Nosic and Weber, 2010;Weber et al, 6 Kaustia et al (2017) also find that much of the information assigned to the factors sociability (see Hong et al, 2004;Brown et al, 2008), cognitive skills (see Christelis et al, 2010;Grinblatt et al, 2011) and health (see Rosen and Wu, 2004;Edwards, 2008) are already captured by households' directly queried risk attitude, which is why we do not control for these factors. 2013).…”

Gender gap in self‐employment: The role of risk attitudes

“…However, we argue that if our estimates suffer from the sample selection bias, it should be small for three reasons. First, selection is less an issue in the countries with high female labour force participation rates (see Olivetti and Petrongolo, ), and Ukraine had been a part of the Soviet Union where an ‘extensive reliance on female labour has been a central feature of … economic development for several decades’, and the Soviet Union claimed to have the highest rates of female employment among the industrialized countries (see Lapidus, ). Second, one of the main causes of female non‐participation in employment is the necessity to take care of children, but Ukraine has one of the lowest birth rates in the world (see The World Factbook, ).…”