PSYCHOLOGY OF FINANCIAL RISK PROPENSITY WITH SPECIAL REFERENCE TO WOMEN ENTREPRENUERS AND MANAGERS IN INDIA

Authors
Director UGC Centre for Womens Studies, Dean, Student Welfare, HOD Deptt. of Psychology, UCSSH, Mohanlal Sukhadia University, Udaipur, India

Prof. Vijaylaxmi Chouhan

Mrs Seema Singh

Research Scholar, Faculty of Social Sciences, MLSU, Udaipur, CMD Aishwarya Education Society, Udaipur, India

Director, Aishwarya Institute of Management and Information Technology, Udaipur, India Email id : asgolwalkar@gmail.com Contact no. 0240 2450301, 9799496949

Dr Archana Golwalkar

Mr Kapil Shrimal
Assistant Professor, Aishwarya Institute of Management and Information Technology, Udaipur, India

Submitted for UGC SPONSORED INTERNATIONAL CONFERENCE

Global Financial Crisis Challenges & Opportunities

(13-15 January, 2011) Bhupal Nobles' P. G. College, Udaipur, India
Broad Paper Submission Area

on

Small Business Development, Entrepreneurship and Skill Development

Psychology of Financial Risk Propensity with special reference to Women Entrepreneurs and Managers in India

ABSTRACT

This article presents an emperical research performed in India on women entrepreneurs and Women Managers studying the differences in the risk propensity with special focus on financial risk propensity. It is an attempt to analyse the financial decision taking tendency on the basis of risk taking attitude crucial to success or failure in the present era of global financial crises. Psychology is the reason for both the consistently superior performance of the methods the financial academics cannot explain, as well as the consistently poorer results of those approaches that fail. The study of investor behavior in markets is still in a budding stage. Understanding towards psychology of financial risk propensity offers the marketplace the opportunity to gain a much clearer understanding of what causes predictable behavior. After the financial reforms in India in 1991-92 the interest and participation of women in Indian financial sector has increased. In a recent survey (July 2010) it is revealed that the female entrepreneurs from India are generating more wealth than the women in any part of the world. The basic qualities required for entrepreneurs and the basic characters of Indian women, reveal that, much potential is available among the Indian women on their entrepreneurial ability. This potential is to be recognized, brought out and exposed for utilization in productive and service sectors for the development of the nation. The present study makes it possible to cast a new sight at the growing women entrepreneurs and managers financial risk propensity and their contribution towards Indian Economy and status on the Global platform. Key Terms: Psychology, Financial Risk Propensity, Women Entrepreneurs, Personality, Socio-demographic Factors.

Psychology of Financial Risk Propensity with special reference to Women Entrepreneurs Managers in India
Background

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Risk propensity is important to business management because business decisions are typically made under risk conditions in which outcomes of the decisions are more probabilistic rather than deterministic in nature; therefore, decision-making agents risk propensity to a significant degree exerts its influence on the agents decision making and potentially determines the eventual outcomes. Furthermore, business decisions are inherently multifaceted in nature, potentially involved some combinations of risks in financial, operational, marketing, and/or even social aspects with high level of ambiguity. Therefore, the decisions are typically made after the issues in these various aspects are collectively taken into account, and risk propensity is a key factor in such decision making process. Introduction People tend to attribute successful outcomes to themselves and failures to others or to circumstances. This leads to an incomplete and biased learning of events and increasing overconfidence. Risk propensity is defined as a general behavioral tendency to take or avoid risk in a specific domain. It is closely related to and frequently equated with actual risk taking. Risk-avoiding decision makers are more likely to attend to and weigh negative outcomes and thus overestimate the probability of losses relative to the probability of gains. They consequently require a higher probability of gain to tolerate the exposure to failure (Schneider & Lopes, 1986). In contrast, riskseeking decision makers are more likely to attend to and weigh positive outcomes more highly and overestimate the probability of gains relative to the probability of losses (Brockhaus, 1980; Vlek & Stallen, 1980). The distinction between risk avoidance and risk seeking is rather similar to the distinction made in regulatory focus theory (Higgins, 1998; Zhou & Tuan Pham, 2004) between prevention focus (avoiding negative outcomes) and promotion focus (striving for positive outcomes). Risk propensity may be relatively stable over time and learned in socialization or acculturation. Yet, it is also changeable and accounts for the capacity of people to learn from experience and adapt their decision making to new situations (Sitkin & Weingart, 1992). Psychology of Risk propensity Risk propensity may also be explained by habitual or routine ways of handling risky situations. These routine patterns tend to persist over time. Decision makers who have been risk averse in the past are likely to continue to make cautious decisions, whereas decision makers who have been risk seeking in the past are likely to continue to make risky and adventurous decisions (Kogan & Wallach, 1964; Rowe, 1977; Slovic, 1972). Yet, a pattern of routine risk taking will not persist when it is proven unsuccessful. Knowledge of outcomes, positive and negative reinforcements, will then affect adaptations to changing circumstances (Osborn & Jackson, 1988). In contrast to the stability of successful decision makers, unsuccessful decision makers will change their strategies. Thus, negative outcomes lead to changes. However, changes are also influenced by whether success and failure are attributed to the actions of the decision makers themselves or to situational factors beyond their control (Einhorn & Hogarth, 1978).

Socio-Demographic Factors In order to explain general effects of socio-demographic factors on risk taking, an evolutionary perspective has been adopted (Wang, Kruger, & Wilke, 2009). Thus, women are less risk taking than men. Parenthood seems to reduce risk taking. Older people show a lower risk propensity. Whether the effects of socio-demographic factors attributed to evolution pertains to economic risk taking is however an unresolved issue. Yet, women are found to be more risk averse in making financial decisions than men (Donkers & Van Soest, 1999; Powell & Ansic, 1997; Weber et al., 2002). Women also tend to own less risky assets than single men or married couples and reduce their risky assets when the number of children increases, in contrast to single men and married couples (Jianakoplos & Bernasek, 1998). Furthermore, older people tend to take less financial risks than younger people (Jianakoplos & Bernasek, 2006). A relevant educational factor is the lack of financial knowledge or, for many people, even the lack of motivation to acquire the necessary financial knowledge (Antonides, De Groot, & Van Raaij, 2008). In a study comparing identical and non-identical twins, Zyphur, Narayanan, Arvey, and Alexander (2009) found a genetic effect on economic risk preferences with the heritability estimated to be 0.63. This means that over half of the variance in risk preferences is explained by genetic factors. Personality Factors Personality factors that have been identified as affecting financial risk taking include sensation seeking, extraversion, impulsivity, openness to experience, conscientiousness, anxiety, and neuroticism. Sensation seeking (Zuckerman, 1994) is motivated by the need for arousal of the central nervous system. This need is met by varied, complex, novel, and intense stimulation and experiences. High sensation seekers have a high need for arousal and therefore tend to take more and larger risks than low sensation seekers (Wong & Carducci, 1991). Extraversion has an established relationship with the need for arousal and therefore with sensation seeking (Lauriola & Levin, 2001). Sensation seeking and extraversion may affect financial risk taking. Young people are generally more extravert and open to new experiences than older people, and this may partly explain the age effect on risk taking. Especially entrepreneurs are widely believed to be willing to assume more risks than, for in-stance, managers and salaried employees (Masters &Meier,1988,31). Thus, Burch (1986,34) argues: the antithesis of the entrepreneur is a person who never loses because he or she never puts himself or herself at risk . On the other hand, many past research findings have indicated that the attitudes of entrepreneurs towards risk-bearing do not necessarily differ from those of the general population (Brockhaus, 1980; Bowen &Hisrich,1986;Unni,1990). This may be partly explained by the fact that many entrepreneurs seem to take risks only after carefully analyzing the situation in hand. This was shown by Moore & Gergen (1985) in their study of risk-taking in business. They showed that individual risk-taking usually involved a propensity to taking or avoiding risks, decision-making skills, and experience with risk-taking behaviour in an organization. In the words of

Moore & Gergen (1985,72): The process of risk-taking involves both making the decision to take a risk and developing a strategy that minimizes the risk. Well-seasoned risk-taking requires careful decision making. Psychology of Financial Risk taking The psychology of financial risk taking is a theoretical and practical discipline that can be used as a tool to preserve your capital. If you preserve your capital, winnings will take care of themselves. The psychology of trading addresses the Paramouncy principle in a systematic manner. Implicit in this principle is that anyone with average intelligence and the ability to continue learning for many years, will eventually become a successful trader. The ability to be persistent and fexible to new ideas is a personal trait of all the traders interviewed by Jack Schwager in his seminal books. Most traders lose money because they do not have an understanding of the markets or themselves. They trade without method, strategy or discipline. They fall prey to powerful emotion, which leads to impulsivity and behaviours more akin to gambling than to genuine understanding. They fall prey to perceptual biases that lead to false conclusions and inappropriate actions. Education is crucial in addressing the Paramouncy principle. The study of investor behavior in markets is still in an budding stage. Although we can statistically trace pattern after pattern of investor behavior, we know little of the dynamics of the complex interactions of cognitive, group, and other psychological forces that underlie them. Psychology offers the marketplace the opportunity to gain a much clearer understanding of what causes predictable behavior. Broadly speaking, the financial risk is that the various financial activities in the enterprise, due to internal and external environment and a variety of unpredictable or uncontrollable factors make the financial system run deviations from the expected goal of forming an Economic loss of opportunity or possibility. The financial results of the activities mentioned here are two aspects, first, the outcome of the financial activities that the proceeds; second is the financial situation of the company's debt service, operations, profitability. Under normal circumstances, the financial risk is the reduction of financial results, financial situation worse possibilities. While every enterprise would like to improve the financial results as much as possible, optimizing the financial position, financial risk is difficult to avoid. Business executives and corporate financial staff is responsible for making a comprehensive understanding of the financial risk arising from links, and can be identified, take appropriate measures to prevent and control, as far as possible to avoid the loss of financial results and financial condition to deteriorate. Components of financial Risks Systematic risk is risk that can't be diversified away. It is risk that impacts the entire market (interest rates, wars, etc). Systematic risk is sometimes referred to as market risk. Unsystematic risk is the company or industry specific risk associated with an investment. This can be diversified against by not throwing all your money in an individual stock. This is called diversification or specific risk. Women Entrepreneurs and Managers

India is brimming with the success stories of women. To name a few Indra Krishnamurthy Nooyi (Chairperson and Chief Executive Officer of PepsiCo), Dr. Kiran Mazumdar Shaw (Entrepreneur, Chairman & Managing Director of Bioon Ltd.), Anu Aga (Chairperson of Thermax Engineering), Sulajja Firodia Motwani (Joint Managing Director of Kinetic Engineering Ltd), Ekta Kapoor (creative head of Balaji Telefilms), Simone Tata (Tata Oil Mills), Priya Paul (Chairperson of Appeejay The Park Hotels chain of boutique hotels) They stand tall from the rest of the crowd and are applauded for their achievements in their respective field. These women leaders are assertive, persuasive and willing to take risks. They managed to survive and succeed in this cut throat competition with their hard work, diligence and perseverance. Ability to learn quickly from her abilities, her persuasiveness, open style of problem solving, willingness to take risks and chances, ability to motivate people, knowing how to win and lose gracefully are the characteristics of the Indian women entrepreneurs. Interest and participation of women in Indian Financial Sector has increased since 1991-92 Financial Reforms in India. In a recent survey it is revealed that the female entrepreneurs from India are generating more wealth than the women in any part of the world. The basic qualities required for entrepreneurs and the basic characters of Indian women, reveal that, much potential is available among the Indian women on their entrepreneurial ability. This potential is to be recognized, brought out and exposed for utilization in productive and service sectors for the development of the nation. Objectives 1. To find out financial risk propensity in women Entrepreneurs and Women Managers. 2. To compare the financial risk propensity in women Entrepreneurs and Women Managers. 3. To find out the difference in financial risk propensity in experienced and fresh women Entrepreneurs and Women Managers. 4. To study the effect of age on financial risk propensity.

Hypotheses 1. Women entrepreneurs possess more financial risk propensity as compared to women Managers. 2. Experienced women entrepreneurs and Women Managers have high risk propensity as compared to fresh women Entrepreneurs and Women Managers. 3. With increase in age financial risk propensity increases. Methodology

Purposive random sampling technique was incorporated for the purpose of data collection. The locale of the study was confined to various parts of India. The sample size considered for the study was 30, 15 women Entrepreneurs and 15 women Managers as fresh/experienced. This empirical research investigation was based on ex post facto factorial design. Occupation is independent variable and financial risk propensity as a dependent variable. Women Entrepreneurs A1 Women Managers A2 Total Data Analysis and Results
Women Enreprenuers Women Managers Mean Scores 71.13 69.27 t test 0.69 Significance Non Significant

N= 15 N= 15 30

Table showing Risk propensity in women Entreprenuers and Managers

Mean Risk Propensity Scores 71.50 71.00 70.50 70.00 69.50 69.00 68.50 68.00 Women Enreprenuers Women Managers Mean Scores

Chart showing Risk propensity in women Entreprenuers and Managers

Interpretation and Discussion Results show that there is no significant difference in financial risk propensity scores in women Entrepreneurs and Managers. Financial Risk Propensity is slightly high in women entrepreneurs as compared to women managers. It is observed that as age increases the financial risk propensity increases. Experienced Women Entrepreneurs and Managers have higher financial risk propensity as compared to fresh ones. Limitations and suggestions

The study was conducted on a small sample restricted to some states of India and not all. The study sample was in age range of 30 to 45 years. Further studies may include more variables as education and annual income, be more exhaustive and include all age groups Conclusion Women owned businesses are highly increasing in the economies of almost all countries. The hidden entrepreneurial/managerial potentials of women have gradually been changing with the growing sensitivity to the role and economic status in the society. Skill, knowledge and adaptability in business are the main reasons for women to emerge into business ventures References
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