A central tenet of long-term investing is to hold riskier investments such as stocks over holding cash or bonds, which are considered less risky. Through various studies that included more than 15,000 American adults, the researchers found that those who think like conservatives politically are more likely to invest like pros and choose options with higher risk and higher rewards, especially when they are confident and optimistic about their ability to invest.
In 2014, US consumers invested more than $1.3 trillion in financial products. According to 2015 data from the Federal Reserve, 94.5% of US households hold financial assets such as cash, certificates of deposit, bonds, stocks, or mutual funds.
Conservatives and risky investing
In one study, researchers measured conservatism by asking participants if they would have voted for Donald Trump or Hillary Clinton in the 2016 presidential election; if they got their news from Fox, CNN, or MSNBC; or if they identify as a Republican or Democrat.
Across the different measures of political identity, researchers consistently found that conservatives tended to employ riskier investment strategies as their self-confidence increased. On the other hand, the tendency for liberals to make riskier investments remained the same as their self-confidence grew.
The study also used data from over 14,000 participants in the Bureau of Labor Statistics’ Consumer Expenditure Survey spanning 1996 to 2012. The researchers, measuring political identity based on the state in which a respondent lived, saw similar results: The likelihood of holding risky assets was higher among those living in conservative-majority states and whose portfolio had grown in the past year, a measure of their financial self-confidence.
The researchers found that self-confident conservatives invest in riskier options because they are more focused on the upside potential of their decision—achieving, increasing, and maximizing potential gains.
“It is this combination of self-confidence and upside focus in the financial decision that increases financial risk-taking among conservatives,” says coauthor Vikas Mittal, a professor of marketing at the Jones Graduate School of Business at Rice University.
Think like a conservative?
The researchers’ findings are not meant to provide investment advice, they emphasize. “Yet, the findings have very important and significant implications for our society and how politicians manage policy for our country,” Mittal says.
“First, it is important to recognize that those who are more confident about their investing capability tend to choose stocks in their portfolio, which maximizes their long-term gains,” Mittal says.
“When people don’t feel confident about themselves or about their investing acumen they short-change themselves in terms of long-term investing. To the extent that this effect—financial risk-seeking due to increased self-confidence—is stronger among conservatives, it may widen the wealth gap among these two groups over time, especially in an environment when people have the freedom to make their own investment choices.”
Second, much of this risk-taking is driven by a focus on the upside among conservatives, the researchers found.
“This focus comes through optimism and a drive to achieve success to maintain or improve one’s position,” Mittal says. “It is this upside focus that could trigger persistence, helping people to stay invested even when stock markets are down. More generally, these results show that financial success can be related to people’s political ideologies in ways that are not intuitively obvious to us.
“Conservatives typically favor self-investing rather than government-regulated options that lower risk and reward. This is compatible with conservatives’ feeling of self-confidence coupled with a focus on upside potential. In the long run, this may create an inbuilt advantage for wealth accumulation among conservatives.”
Mittal concludes, “Strikingly, this advantage is not directly related to their political ideology but conservatives’ response to self-confidence and optimism. To the extent these are learned behaviors, it may be useful for everyone—regardless of their political ideology—to adopt and emulate them.”
Source: Rice University