1. Thomas PostThe impact of gender-specific investment behavior … ARIA Annual Meeting Quebec, 2007 August 6, 2007- 1 - Dr. Wolfgang Schieren Chair for Insurance and Risk Management The impact of gender-specific investment behavior for retirement welfare: Evidence from the U.S. and Germany Helmut Gründl* Thomas Post* Joan T. Schmit** Anja Zimmer* * Humboldt-Universität zu Berlin ** University of Wisconsin-Madison

2. Thomas PostThe impact of gender-specific investment behavior … ARIA Annual Meeting Quebec, 2007 August 6, 2007- 2 - Dr. Wolfgang Schieren Chair for Insurance and Risk Management 1 Motivation (1)  Demographic shift, with low birth rates and increasing longevity  Strain placed on public and private pension systems  Concern over the adequacy of retirement accumulations

3. Thomas PostThe impact of gender-specific investment behavior … ARIA Annual Meeting Quebec, 2007 August 6, 2007- 3 - Dr. Wolfgang Schieren Chair for Insurance and Risk Management  Research shows differences in investment behavior according to  Age, gender, education, wealth, income, culture, risk attitude  Usually, women are found to be more risk-averse  Research questions  What differences in retirement wealth result from different investment decisions? -Monetary benchmark (€, $)  What differences in retirement welfare result from different investment decisions? -Utility benchmark  Special focus on gender-specific effects 1 Motivation (2)

4. Thomas PostThe impact of gender-specific investment behavior … ARIA Annual Meeting Quebec, 2007 August 6, 2007- 4 - Dr. Wolfgang Schieren Chair for Insurance and Risk Management 2 Literature Overview Positive perspective - How do people invest? - What factors drive investment behavior? - How do people differ in risk attitude? Barsky et al., 1997; Halek and Eisenhauer, 2001; Poterba and Samwick, 2001; Bertaut and Starr-McCluer, 2002; Eymann and Börsch-Supan, 2002; Ameriks and Zeldes, 2004 … Normative perspective - How should people invest, given preferences, endowments, and opportunity sets? Perfect market solutions: Phelps, 1962; Yaari, 1965; Mossin, 1968; Hakansson, 1969, 1970; Merton, 1969, 1971; Samuelson, 1969; Richard, 1975 More realistic conditions: Zeldes, 1989; Deaton, 1991; …; Cocco et al., 2005; … Combination of both approaches - What are the welfare/utility consequences of investing suboptimally? Dammon et al., 2004: tax optimal asset location vs. commonly observed location choices Cocco et al., 2005: optimal asset allocation vs. common investment advisers’ recommendations Yao and Zhang, 2005: optimal renting / owning a house strategy vs. only renting or housing  Our contribution: optimal asset allocation vs. in the data observed behavior

5. Thomas PostThe impact of gender-specific investment behavior … ARIA Annual Meeting Quebec, 2007 August 6, 2007- 5 - Dr. Wolfgang Schieren Chair for Insurance and Risk Management 3 Research Steps Econometric Analysis Specification and Calibration of Normative Model Actual Decisions & Drivers of Actual Decisions Simulation of Retirement Wealth Optimal Decisions Welfare Analysis „Are there important differences in retirement wealth?“ „Are the differences in retirement wealth really important (from an utility perspective)?“

6. Thomas PostThe impact of gender-specific investment behavior … ARIA Annual Meeting Quebec, 2007 August 6, 2007- 6 - Dr. Wolfgang Schieren Chair for Insurance and Risk Management Today Econometric Analysis Actual Decisions & Drivers of Actual Decisions Specification and Calibration of Normative Model Simulation of Retirement Wealth Optimal Decisions Welfare Analysis „Are there important differences in retirement wealth?“ „Are the differences in retirement wealth really important (from an utility perspective)?“

7. Thomas PostThe impact of gender-specific investment behavior … ARIA Annual Meeting Quebec, 2007 August 6, 2007- 7 - Dr. Wolfgang Schieren Chair for Insurance and Risk Management 5 Econometric Analysis  Data  Singles (neither married or living with partner) -Clear indication of who makes decisions (vs. analysis on household level) and his or her characteristics -Normative optimization model kept tractable (vs. interactions in the household)  U.S. data: Survey of Consumer Finances (SCF) 2004 -1,393 singles  German data: Income and Expenditure Survey (EVS) 2003 -12,631 singles

8. Thomas PostThe impact of gender-specific investment behavior … ARIA Annual Meeting Quebec, 2007 August 6, 2007- 8 - Dr. Wolfgang Schieren Chair for Insurance and Risk Management 5.1.1 Descriptives SCF

9. Thomas PostThe impact of gender-specific investment behavior … ARIA Annual Meeting Quebec, 2007 August 6, 2007- 9 - Dr. Wolfgang Schieren Chair for Insurance and Risk Management 5.1.2 Descriptives EVS

10. Thomas PostThe impact of gender-specific investment behavior … ARIA Annual Meeting Quebec, 2007 August 6, 2007- 10 - Dr. Wolfgang Schieren Chair for Insurance and Risk Management 5.1.3 Summary of Descriptive Results  Pooled data: significant divergence in wealth distribution between females and males in both countries  Risky asset holdings: greater for males and females who, on average,  are younger, more educated, earn substantially more income, and have substantially more networth  Investment behavior seems to differ between both countries  On average, Americans invest a higher share in risky assets  Share of risky assets given investment > 0 -higher for males in the U.S. -does not differ between German males and females

11. Thomas PostThe impact of gender-specific investment behavior … ARIA Annual Meeting Quebec, 2007 August 6, 2007- 11 - Dr. Wolfgang Schieren Chair for Insurance and Risk Management 5.2 Regression Analysis Two approaches  Tobit: Decision to own risky assets and share made simultaneously  Probit/Truncated OLS: Decision to own risky assets may be independent from the share finally invested

12. Thomas PostThe impact of gender-specific investment behavior … ARIA Annual Meeting Quebec, 2007 August 6, 2007- 12 - Dr. Wolfgang Schieren Chair for Insurance and Risk Management 5.2.1 Regression Analysis SCF

13. Thomas PostThe impact of gender-specific investment behavior … ARIA Annual Meeting Quebec, 2007 August 6, 2007- 13 - Dr. Wolfgang Schieren Chair for Insurance and Risk Management 5.2.2 Regression Analysis EVS

14. Thomas PostThe impact of gender-specific investment behavior … ARIA Annual Meeting Quebec, 2007 August 6, 2007- 14 - Dr. Wolfgang Schieren Chair for Insurance and Risk Management 5.2.3 Discussion of Regression Results (1)  U.S.  Dummy variable for gender not significant  Differences in investment behavior seem to vanish after controlling for education, employment status, income, assets…  But: coefficients in separate male/female regressions differ  Differences still present for slope of regression equation  For example: for any level of assets/income (considering the simultaneous effect on income, assets, networth) females invest more into the risky asset (Tobit/Truncated OLS)  Interpretation under CRRA utility (see, Haliassos, and Michaelides, 2003): women are less (relative) risk averse

15. Thomas PostThe impact of gender-specific investment behavior … ARIA Annual Meeting Quebec, 2007 August 6, 2007- 15 - Dr. Wolfgang Schieren Chair for Insurance and Risk Management 5.2.3 Discussion of Regression Results (2)  Germany  Dummy variable for gender significant and negative in all regressions  Females seem to be more risk-averse: smaller likelihood to hold the risky asset and lower share invested  Equal investment share, given investment > 0 (descriptives) = result of lower assets value of females (negative coefficient in truncated OLS multiplied with smaller asset value)  Again: coefficients in separate male/female regressions differ  Differences also present for slope of regression equation  For example: here, for any level of assets/income (considering the simultaneous effect on income, assets, networth) females invest less into the risky asset (Tobit/Truncated OLS)  Interpretation under CRRA utility: women are more (relative) risk averse

16. Thomas PostThe impact of gender-specific investment behavior … ARIA Annual Meeting Quebec, 2007 August 6, 2007- 16 - Dr. Wolfgang Schieren Chair for Insurance and Risk Management 5.2.3 Discussion of Regression Results (3)  Other results  Age has a hump-shaped effect on the share invested in risky assets in the U.S. but an U-shaped effect in Germany  Owning a house has a much stronger (-) effect on risky asset holding (share/ownership) in the U.S.  R 2 much better for Tobit and Probit model for U.S. data (  38%) than for German data (  15%)  …

17. Thomas PostThe impact of gender-specific investment behavior … ARIA Annual Meeting Quebec, 2007 August 6, 2007- 17 - Dr. Wolfgang Schieren Chair for Insurance and Risk Management 5.2.3 Discussion of Regression Results (4)  Summary  Magnitude, sometimes also the sign, of coefficients for holding risky assets and risky share differ between both countries, males and females  Gender effect for Germany, women invest less riskily  For the U.S. no gender effect (intercept) / ambiguous (slope)  Implications  Differences in investment behavior between males and females, Germany and the U.S.  Often driven by different financial and demographic characteristic  But also by differences in risk attitudes

18. Thomas PostThe impact of gender-specific investment behavior … ARIA Annual Meeting Quebec, 2007 August 6, 2007- 18 - Dr. Wolfgang Schieren Chair for Insurance and Risk Management 6 Specification and Calibration of Normative Model / Welfare Analysis (1)  More conservative investment strategies lead on average to lower retirement wealth  But: if differences in risk aversion drive the investment strategy, accepting lower retirement wealth may be perfectly optimal from the individuals standpoint  Therefore, non-monetary evaluation of investment behavior necessary

19. Thomas PostThe impact of gender-specific investment behavior … ARIA Annual Meeting Quebec, 2007 August 6, 2007- 19 - Dr. Wolfgang Schieren Chair for Insurance and Risk Management 6 Specification and Calibration of Normative Model / Welfare Analysis (2)  Benchmark Model: realistically calibrated intertemporal expected utility framework  CRRA utility  Borrowing (?) and short-selling constraints  Stochastic -Labor/pension income -Life-span -Asset returns (risky asset, real estate (?))  Decisions on: consumption, saving, debt (?), asset allocation: risk-free, risky, annuities (?), housing (?)

20. Thomas PostThe impact of gender-specific investment behavior … ARIA Annual Meeting Quebec, 2007 August 6, 2007- 20 - Dr. Wolfgang Schieren Chair for Insurance and Risk Management 6 Specification and Calibration of Normative Model / Welfare Analysis (3)  Calibration issues  Coefficient of relative risk aversion of each respondent?  Asset allocation over the life-cycle of each respondent? -Constant as observed now -Constant gap (as observed now) to optimal decision -As predicted by regression (depending on age, …)  Housing, debt decisions?

21. Thomas PostThe impact of gender-specific investment behavior … ARIA Annual Meeting Quebec, 2007 August 6, 2007- 21 - Dr. Wolfgang Schieren Chair for Insurance and Risk Management 7 Conclusions and Outlook for Further Research  Regression results indicate differences in investment behavior between males and females, Germany and the U.S.  Retirement wealth likely to vary by gender  Policy implications cannot be derived at present  Observed differences in risk-aversion make utility based evaluation necessary