When partners find that they have different attitudes to risk, there are many sensible ways to proceed.
A modest new feature
Before this week’s post, permit me to draw your attention to a modest new feature.
A reader suggests: “When you send out a blog, is there any way of updating us on responses to previous blogs? This would help me immensely, as I would not have to search through them to see if I’ve missed anything. In some cases these comments have led to interesting expansions of the conversation … As a visitor to your site, let me reiterate the benefit of that last point to an avid follower such as me.”
Thank you. Very good advice. I’m grateful for the time readers devote to the website — I should make it easy rather than difficult for you! From now on, with the first post of every month I’ll list the posts that have drawn comments in the previous month.
Here’s the first such list:
On to this week’s post.
It’s trite to remark that people are different. One occasion when the differences may be important is when you need to decide where you are on the eat-well-versus-sleep-well spectrum. Let’s discuss what happens if you’ve actually discussed the subject, along the lines in the three previous posts, and you’ve come to the conclusion that your risk tolerances are different.
Before I list the five possible ways to deal with it (of which only one is wrong – the other four can all work, depending on the circumstances), let me say that typically the man is willing to take more risk than the woman. And I say this because it’s probably hard-wired into our brains, to be that way.
You may read elsewhere that it’s the neurotransmitter (brain chemical) dopamine that drives us to take risks, but that’s not the explanation here, because both men and women have lots of dopamine going through our brains. It’s testosterone that causes men to typically take much more risk than women. It’s a neurotransmitter that drives aggression and risk-taking, and men typically produce ten times as much testosterone as women.
Researchers Barber and Odean wrote a paper about risk-taking in investment. They looked at thousands of household brokerage accounts, and found that men are more overconfident than women, they therefore trade much more frequently, and since there’s no basis for overconfidence their results are much worse. The differences were so stark that, instead of the typical jargon-filled academic title, they called their paper “Boys will be boys.” And they led it off with a lovely quote from nineteenth century American humorist Josh Billings: “It’s not what a man don’t know that makes him a fool, but what he does know that ain’t so.”
OK, enough fun. Let’s suppose you’re both sensible, not overconfident, and disagree about how much risk is tolerable. It’s straightforward to list all five ways you can resolve the difference.
- Go with the one who wants to take more risk. The probable (not certain – nothing is ever certain) outcome is that you will both eat more, and one will sleep less well than he (or more likely she) is comfortable with.
- Go with the one who wants to take less risk. The probable outcome is that you will both eat less.
- Take the average of the two. The probable outcome is that you will eat less well than if you took more risk, but better than if you took less risk; and one will sleep less well than is comfortable.
- Divide the assets according to whatever formula you can agree on, and each invests his or her own portion and lives with the consequences.
- Ask your investment professional to make the decision for you.
I don’t know how you and your partner resolve serious differences, but really those are the options open to you. They’re probably uncomfortable, unless the difference is small and you go with the third option (the average), in which case the impact on the eating and sleeping outcomes may not be large.
The fifth option is the one that’s simply wrong. Why? Because this isn’t an investment issue, as I’ve stressed (http://donezra.com/42-your-fundamental-investment-choices-eat-well-or-sleep-well/). This is a personal issue. And, as I stressed in Post #2 (http://donezra.com/you-dont-need-to-become-an-expert/) about being an informed consumer of expertise, in this case you are the experts on the subject of yourselves, and it isn’t investment expertise that you need to resolve this, it’s expertise on the subject of knowing yourselves. That’s not your investment professional’s natural domain.
Perhaps you can find someone else (a member of the family, a friend?) who knows you both almost as well as you know yourselves and can bring some external or objective wisdom to bear on the disagreement.
It’s a tough one.
It’s natural for partners to have different attitudes towards risk. It may be difficult to find a single approach that leaves both reasonably comfortable. But remember that this difference is a personal issue, not an issue requiring investment expertise.
 Barber, Brad M. and Terrance Odean (2001). “Boys will be boys: gender, overconfidence, and common stock investment,” The Quarterly Journal of Economics, February 2001. Available at SSRN: https://ssrn.com/abstract=139415 or http://dx.doi.org/10.2139/ssrn.139415.
I have written about retirement planning before and some of that material also relates to topics or issues that are being discussed here. Where relevant I draw on material from three sources: The Retirement Plan Solution (co-authored with Bob Collie and Matt Smith, published by John Wiley & Sons, Inc., 2009), my foreword to Someday Rich (by Timothy Noonan and Matt Smith, also published by Wiley, 2012), and my occasional column The Art of Investment in the FT Money supplement of The Financial Times, published in the UK. I am grateful to the other authors and to The Financial Times for permission to use the material here.