The Influence of Gender on Individuals’ Ability to Predict Their Own Risk Tolerance: Evidence from a European Country

Abstract

The literature on individuals’ ability to predict their own level of risk tolerance is scarce and presents divergent results. Utilizing both differential prediction models and logit models on a sample of 391 individuals in Portugal, this study demonstrates that respondents’ gender play a crucial role in this predictive ability. Men tend to overestimate their level of risk tolerance, while women tend to believe they are less risk-tolerant than they actually are. Furthermore, the results reveal that men’s ability to correctly predict their level of risk tolerance is significantly higher. Being a man implies a 20% higher probability of being consistent in this prediction compared to being a woman, even after controlling for a set of sociodemographic factors. The finding of a systematic inconsistency between measures of subjective and objective risk tolerance suggests that the choice between the two measures of risk propensity is not indifferent. Our findings have relevant implications in the fields of corporate finance, financial investment, and various other spheres of economic life.

Keywords

• risk tolerance
• subjective risk tolerance
• objective risk tolerance
• survey
• gender
• Portugal