UROP: cROSS-NATIONAL dIFFERENCES IN fINANCIAL RISK AVERSION Zheng Xinyi DEPARTMENT OF ACCOUNTING AND FINANCE

Financial risk aversion What is risk aversion? Consumers and Investors Uncertainty Attempt to Lower the Uncertainty Example: Bank versus Stock Financial risk aversion, defined as the maximum amount of uncertainty that someone is willing to accept when making a financial decision, reaches into almost every part of economic and social life. It is the hesitation of a person to agree to a situation with an unknown payoff rather than another situation with a more predictable payoff but possibly lower expected payoff. For example, a risk-averse investor might choose to put their money into a bank account with a low but guaranteed interest rate, rather than into a stock that may have high expected returns, but also involves a chance of losing value.

The Factors that affect investor’s financial risk aversion Increasing levels of risk tolerance have been associated with being: Male Older Single Professionally Employed with Higher Incomes More Education More Financial Knowledge Increased Economic Expectations ---- Bajtelsmit & Bernasek, 1996; Blume, 1978; Hawley & Fujii, 1993-1994; McDermott, 1979; Rubin & Paul, 1979; Sung & Hanna, 1996; Baker & Haslem, 1974; Cicchetti & Dubin, 1994; Cohn, Lewellen, Lease, & Schlarbaum, 1975; Masters, Riley, & Chow, 1992; Schooley & Worden, 1996; Shaw, 1996; Zhong & Xiao, 1995 The research on risk aversions was began many years ago. Discriminant analysis results indicated that risk tolerance was associated with being male, older, married, professionally employed with higher incomes, more education, more financial knowledge, and increased economic expectations. Findings suggest that the achievement of financial success can be explained, at least in part, by a combination of someone's personality characteristics and socioeconomic background.

Nationality? What Else? American Versus Chinese: Who you think is more risk-averse? Who you think is more risk-seeking? In today’s global perspective, what should we also pay attention to? It’s obvious that people living in different countries have different financial risk tolerance due to their different cultures.

Risk Aversions in Investment, Medical, and Academic decisions American Investors Are More Risk-averse Than Chinese Investors “Cushion Hypothesis” Individualistic Culture Versus Collectivist Culture ---- Weber and Hsee (1998, 1999) Weber and Hsee (1998, 1999) They believe that Americans are more risky than other Chinese in other behaviors. The only exception is financial investment behavior. They find that Chinese investors are more risk-accepting than investors in Western economies. They purpose the so-called “cushion hypothesis” which argues that in an individualistic culture, people cannot receive financial help through their families as easily as those in a collectivist culture. Accordingly, people in China are able to more easily insure against financial risks, making them more aggressive investors.

Survey design Sample: Undergraduate Business Students (213 valid feedback in total) China: Ocean University of China, School of Management, U.S.: University of Minnesota Duluth, Labovitz School of Business and Economics Survey Self-assessment: Five Parts: Demographical Factors General Risk Aversion Financial Risk Aversion Social Cushion Scenario Questions

pART 1: demographical factors Age Gender Business Knowledge (Especially Financial Knowledge) Economic Status

pART 2: General risk aversion Enjoyment of the Visceral Sensation of Fear Itself “Glossophobia” (i.e. speech anxiety) Initiative Optimistic Resolute Open Position Impulse Aggressive

pART 3: Financial risk aversion Similarly, we measured the financial risk version by observing some related factors: Financial Discretion Interest in High-risk Financial Activities Attitude Toward Financial Activities (i.e., optimistic or pessimistic) Interest in Financial Markets

pART 4: Social Cushion For all different social cushions, we mainly focus on the cushion from families as it is the subject mainly discussed when referring “cushion” in the previous studies. Family Bonds Independence Financial Help from Family Psychological Help from Family

sCENARIO 1: The price of a lottery

sCENARIO 2: STOCK VERSUS RISK-FREE BOND

BASIC STATISTICal SUMMARY

Correlation

Regression modeling WITH INTERACTIONS -- Scenario 1 Pool Sample Significant Factors: Gender Sum24: Financial Risk Aversion Nationality

REGRESSION MODELING with iNTERACTIONS --Scenario 2 Pool Sample Significant Factors: Financial Work Experience Family Nationality Interaction of Major and Nationality Interaction of Financial Work Experience and Nationality Interaction of Family and Nationality

cONCLUSION Based on the empirical findings, now we know Chinese students are less risk-averse in financial decisions than American students, but social cushion is not so important in the process. Except the finding above, we also find that: Regardless of nationality, people who has less risk aversion in their daily activities has less risk aversion in financial activities as well, and at the same time, they receive less social cushion. The economic status of family has a positive relationship with the social “cushion”. Social “cushion” has a negative relationship with the risk-aversion (i.e., the more social cushion one has, the more risk-averse he is), but the affect is not very significant, especially compared to other factors (e.g., gender, family status, nationality, etc.). (The blowout of U.S. student debt to some $1.3 trillion, more than credit card debt, is astonishing. More than 7 million student borrowers are in default and millions are still struggling to repay their loans. ) In China, it’s a very different situation. Student debt is virtually non-existent. https://www.forbes.com/sites/jlim/2016/08/29/why-china-doesnt-have-a-student-debt-problem/#4a3caf9a1a5 More than a third of all the students interviewed indicated they attended college on a scholarship, and of those, half said they couldn’t have afforded it without that break. That percentage was even higher for students in the United States -- 58 percent. Chinese students were the most likely to afford a university without a scholarship -- 81 percent of the 500 or so students interviewed. https://www.insidehighered.com/news/2017/09/07/study-american-students-more-stressed-about-money

Some possible explanations: Tuition and Student Loan in U.S. As social “cushion” is not a significant variable in our model, what other factors may lead this cross-national difference in financial risk aversion? Some possible explanations: Tuition and Student Loan in U.S. One-child Policy in China Different mechanisms of colleges (local students versus interstate students) The Limitations of Self-assessments (subjective) (The blowout of U.S. student debt to some $1.3 trillion, more than credit card debt, is astonishing. More than 7 million student borrowers are in default and millions are still struggling to repay their loans. ) In China, it’s a very different situation. Student debt is virtually non-existent. https://www.forbes.com/sites/jlim/2016/08/29/why-china-doesnt-have-a-student-debt-problem/#4a3caf9a1a5 More than a third of all the students interviewed indicated they attended college on a scholarship, and of those, half said they couldn’t have afforded it without that break. That percentage was even higher for students in the United States -- 58 percent. Chinese students were the most likely to afford a university without a scholarship -- 81 percent of the 500 or so students interviewed. https://www.insidehighered.com/news/2017/09/07/study-american-students-more-stressed-about-money

FUTURE WORK Sample Bias Sample Size Survey Design Asking questions properly. The definition of “social cushion”. Sample Bias Gender U.S Sample (Male-to-Female): 2.07:1 China Sample (Male-to-Female): 0.36:1 The distribution of the economical Statuses of the Family

Q&A