Gender differences in optimism, loss aversion and attitudes towards risk

Systematic differences in the attitudes of men and women towards risk is well established. In this paper, we investigate the joint role of two prominent psychological characteristics in explaining this difference. Our starting point is that risk assessments can be thought of, in general terms, to combine beliefs about the probability of negative outcomes occurring with a subjective valuation of how painful that negative outcome would be. Exploiting large-scale panel data from the United Kingdom, we find that gender differences in financial optimism and financial loss aversion - the stronger psychological response to monetary losses than monetary gains - explain a substantial proportion of the parallel gender difference in willingness to take risks. This result prevails even after controlling for the Big Five personality traits, suggesting that the prominent psychological characteristics capture different aspects of behaviour than the Big Five.