Risk Appetite and Financial Decision Making

Posted by Liz Rees in Portfolio management category on 03 May 17

Despite a loss of confidence in the future of the UK economy, Willis Owen data shows that people are getting more comfortable with the concept of risk when it comes to their personal finances. Perhaps many are realising that some risk is needed in order to meet long-term financial goals – being able to support a family or enjoy a comfortable retirement. That said, few of us are changing our saving or investment behaviour as a result.

How much of a risk-taker are you when it comes to your finances? What kind of decisions do you consider risky? We commissioned a leading online research firm to shed light on these questions – here’s what we found:

  • The number of UK adults prepared to take financial risk has increased from 44% to 47% in the last year
  • The biggest increase in risk appetite is among those willing to take ‘some’ financial risk from 29% to 33%
  • However, only 12% and 2% are willing to take ‘reasonable’ and ‘substantial’ risk, respectively
  • 58% of men willing to take a risk compared with only 37% of women.

We are becoming a riskier nation on the whole… 

Overall, the number of UK adults prepared to take financial risk has increased. Last year, the percentage of savers and investors willing to take a risk stood at 44%, growing this year to 47%. The biggest increase in risk appetite is among those willing to take ‘some’ financial risk, climbing from 29% in 2016 to 33% in 2017. This is an encouraging sign that people are becoming more aware of risk when it comes to saving and investing – for every financial decision (putting money into a savings account rather than an ISA, or spending money instead of stowing it away) is a risk to a greater or lesser extent.

… but only in moderation

However, the number of people willing to take ‘substantial’ risk has dropped from 3% to 2%, showing that when it comes to placing bigger bets, we’re still a nation of cautious investors. This attitude fits with where people would choose to put their money if they received a real-term pay rise. Only 1 in 12 (8%) say they would invest in a Stocks and Shares ISA, which is often perceived as a riskier savings and investment option, whereas 37% would save into a savings account and 22% would save into a Cash ISA. This suggests that we don’t know how to translate our appetite for risk into an understanding of the kinds of decisions we’re able to make.

Risk Image

For many of us, taking a risk only sounds sensible when we know we properly understand our options – the benefits as well as the potential dangers. A lack of financial education remains a problem. We know we need to take more risk, particularly in the current savings environment, but we’re unsure about how to go about it.

Men and women diverge in their risk attitudes

The findings reveal that while 58% of men say they are willing to take financial risk, only 37% of women say they are willing to do so. The biggest difference is between men willing to take a ‘reasonable’ amount of financial risk (17%), provided there is a good chance of return, and women willing to do the same (7%). 

The gender differences in attitudes towards risk reinforce the long-held assumption that women are more risk averse than men when it comes to their personal finances. The fact that such a big gap exists suggests the need for more understanding around the different ways in which men and women view risk and how this can be used to aid them in making the best decisions for their finances. 

Risk Image

Other variations in attitudes to risk

People working full-time are the most likely to take financial risk at 56%, compared to those working part-time (51%), and those who are retired (45%) or unemployed (25%). A significantly higher proportion of those not in work are averse to taking any kind of risk at 60% - perhaps a reflection of a relative lack of financial security. 

Brighton (58%), Southampton (56%), Bristol (54%), Manchester (54%) and London (53%) rank well above the national average (47%) in terms of their risk-taking behaviour. At the other end of the spectrum, people in Cardiff (52%), Liverpool (51%), Plymouth (51%) and Norwich (51%) are the least likely to take financial risk. 

Understanding your options

One tool which may help you do this is : play. By simulating real investing, but without using real money, it allows you test out different scenarios – including some which may involve more risk than others. There’s no guarantee that what happens once will happen again, but it will allow you to try out different strategies in a safe way.

Source: Opinium Research conducted an online survey between 14th and 22nd February 2017, among 2,299 UK adults aged 18+. Results have been weighted to nationally representative criteria.