See discussions, stats, and author profiles for this publication at: https://www.researchgate.

net/publication/253221786

Countries and Culture in Behavioral Finance

Article  in  CFA Institute Conference Proceedings Quarterly · September 2008

DOI: 10.2469/cp.v25.n3.6

CITATIONS READS
48 4,349

1 author:

Meir Statman
Santa Clara University
165 PUBLICATIONS   10,424 CITATIONS   

SEE PROFILE

Some of the authors of this publication are also working on these related projects:

My book "Finance for Normal People: How investors and markets behave" to be published by Oxford University Press early next year. View project

All content following this page was uploaded by Meir Statman on 20 March 2017.

The user has requested enhancement of the downloaded file.

 NOT FOR DISTRIBUTION

Countries and Culture in Behavioral

Finance
Meir Statman
Glenn Klimek Professor of Finance
Santa Clara University
Santa Clara, California

Behavioral finance has made important contributions to the field of investing by focusing
on the cognitive and emotional aspects of the investment decision-making process.
Although it is tempting to say that people are the same everywhere, the collective set of
common experiences that people of the same culture share will influence their cognitive
and emotional approach to investing. In this article, the author discusses the many
cultural differences that may influence investor behavior and how these differences may
influence the recommendations of a financial advisor.

have asked several questions as I explored sim-
I ilarities and differences among people of various
countries: Do propensities for risk, regret, and max-
imization vary by country of origin? Do they vary
by gender and age? Do levels of trust and happiness
vary by country? And the final question is whether
the differences matter if a manager is working only
with clients in the United States.
The questions relate to behavioral finance, which
is the description of perceptions and behavior of
people facing financial choices. In particular, behav-
ioral finance helps describe the effect of those choices
on individuals, their families, companies, and mar-
kets and then offers prescriptions for better choices.
Culture Really Matters
People are affected by their cultures and experiences.
I was in Estonia earlier this year speaking to invest-
ment professionals, and as I was preparing for my
trip, I was thinking about how I should adapt mate-
rials I use in the United States to reflect differences
between the United States and Estonia. One voice in
me said that people are the same all over the world,
similar not only in physical features but also in cog-
nition and emotions. So, no need exists to adapt my
materials. But another voice reminded me that peo-
ple in different countries are often placed within
This presentation comes from the Wealth Management 2008 conference
held in Atlanta on 8–9 April 2008.
different cultures that affect perceptions, expecta-
tions, cognition, and emotions. I was reminded of
coming to New York from Israel in 1973 to study for
my PhD at Columbia University. I was struck by
differences between the culture I knew from life in
Israel and the culture in the United States. For exam-
ple, while sitting in a train I overheard one man
saying to another, “I told my daughter that I would
support her through college but she is on her own
afterward.” I was astonished. The culture I knew in
Israel was one in which parents continue to support
their children long after college. Indeed, it was com-
mon for parents to give children sizeable amounts to
buy a condominium when they got married. (Mort-
gage loans were quite limited in Israel at the time,
available only to cover relatively small portions of
the price of a condominium.)
So, as I was planning my visit to Estonia, I won-
dered how people in Estonia are different from peo-
ple in the United States. How have their experiences
shaped their perceptions, and are their perceptions
different from those of people in the United States?
Estonia broke away from the Soviet Union almost 20
years ago, and although many older people found it
hard to adjust to life under capitalism, younger peo-
ple adapted quickly. The investment professionals I
met were typically in their late 20s or early 30s. More-
over, the people of Estonia also have constructed a
brand new savings and investment system that
might well be better than that in the United States. It

38 • SEPTEMBER 2008 ©2008, CFA Institute • cfa pubs .org

 NOT FOR DISTRIBUTION
is a three-pillar system, composed of the equivalent
of the U.S. Social Security system, mandatory savings
that are matched by the government and that can be
invested in stocks, and voluntary savings.
In “Does Culture Affect Economic Outcomes?”
Guiso, Sapienza, and Zingales (2006) defined cul-
ture as “those customary beliefs and values that
ethnic, religious, and social groups transmit fairly
unchanged from generation to generation.” Culture
matters, and it is persistent. In “Cultures of Corrup-
tion: Evidence from Diplomatic Parking Tickets,”
Fisman and Miguel (2006) examined whether diplo-
mats took advantage of immunity from prosecution
to park wherever they wanted in New York City and
not pay parking fines. They found that diplomats
from some countries took advantage of their posi-
tions but others did not. Diplomats from Kuwait, for
example, accumulated 246 tickets per diplomat dur-
ing 1997–2002, but diplomats from the United King-
dom, the Netherlands, Australia, and Norway
accumulated no parking tickets whatsoever. Even
more interesting is that the number of parking tick-
ets per diplomat was generally higher in countries
where corruption levels are higher. It seems that
people import norms from the culture they know
into their new surroundings.
Trust is one aspect of culture. A commonly used
question about trust asks, “Generally speaking,
would you say that most people can be trusted or that
you cannot be too careful in dealing with people?”
Guiso and his colleagues (2006) found that immi-
grants to the United States bring cultural norms of
trust from their countries of origin. Those who immi-
grated into the United States from less trusting soci-
eties tend to be less trusting even when they live in
the United States. Moreover, in “Trusting the Stock
Market” (2007), Guiso and his colleagues found that
people who are generally trusting are more likely to
invest in stocks than people who are not.
In an earlier study, “Local Ethics in a Global
World” (2007), I asked a question about perceptions
of fairness of insider trading based on a notable 1998
Supreme Court decision. In my question, “Mr.
Bond” is a partner in a law firm who overhears other
lawyers at his firm discussing a merger they are
working on. Acting on the information, he buys
shares in the target company and profits from the
merger. Is his behavior completely fair, acceptable,
unfair, or very unfair?
I asked this question of professionals in eight
countries. Insider trading is unlawful in each.
Table 1 shows the results. In the United States, only
5 percent of professionals said Mr. Bond’s behavior
is completely fair or acceptable. But in other coun-
tries, a higher percentage thought the behavior was
fair—for example, 16 percent in Australia, 43 per-
©2008, CFA Institute • cfa pubs .org
Countries and Culture in Behavioral Finance
Table 1. Perceptions of the Fairness of Insider
Trading by Finance Professionals in
Eight Countries
Percentage Who
Rated Bond’s
Behavior Completely
Country Fair or Acceptable Rank
Turkey 56% 1
India 49 2
Italy 43 3
Tunisia 41 4
Australia 16 5
Israel 16 6
Netherlands 5 7
United States 5 8
Note: Text of Question:
Paul Bond is a lawyer at the Brown & Long law firm. One day
while standing outside his office at Brown & Long he overheard
John Grand, another lawyer at the firm, talking with an associate
about his work on a proposed purchase of the Pillow company
by the Down company for $120 per share. Paul Bond had no role
in the work on the proposed purchase of Pillow and Brown &
Long represented only Down, not Pillow. Paul Bond bought 1,000
shares of Pillow for $70 per share. Please rate Paul’s behavior as:
Completely Fair, Acceptable, Unfair, or Very Unfair.
Source: Statman (2007).
cent in Italy, and 56 percent in Turkey. The point is
that societal norms and perceptions of fairness
vary from country to country.
Finding the Differences
To explore the role of countries and culture in finan-
cial decisions, I conducted a survey in 22 countries
with the help of colleagues in each country. The
respondents were university students, and the sam-
ple size was large. Altogether, more than 4,000 people
participated in the surveys, and although the num-
bers varied by country, each country was represented
by no less than 100 people. I begin by discussing
some of the questions on the survey and then present
the emerging patterns.
The first question of the survey focused on the
propensity for risk when lifetime income is at stake:
Suppose you are the only income earner in the
family, and you have a good job guaranteed to
give you and your current family income every
year for life. Now you are given an opportunity
to take a new and equally good job. The new job
has a 50/50 chance to increase by 50 percent
your standard of living each year during your
lifetime. However, the new job also has a 50/50
chance to reduce by X percent your standard of
living each year during your lifetime. Circle the
maximum X percent reduction in standard of
living you are willing to accept.
SEPTEMBER 2008 • 39
 NOT FOR DISTRIBUTION
CFA Institute Conference Proceedings Quarterly

The possible answers ranged from 3 percent to Table 2. Propensity for Taking Risk in
30 percent. Many investor questionnaires about risk Income and Portfolio of Investors
have multiple questions that do not get to the main in Various Countries
issue about risk. Risk is not a matter of whether one How Much Downside How Much Downside
is concerned about volatility or whether one would in Income Are You in Portfolio Are You
gamble with $1,000, because that amount is a lot of Willing to Accept for Willing to Accept for
money to some people but very little to others. Time a 50/50 Chance of a 50/50 Chance of
Country a 50% Upside? a 50% Upside?
horizons also vary from person to person and are
China 15.56% 17.06%
not always captured in risk questionnaires. A young
Vietnam 13.89 16.34
person has many years to recover a $1,000 loss, but
Holland 13.40 15.92
an older person has fewer years. The question I
Taiwan 13.29 15.43
asked is about lifetime income, a substantial and
Turkey 12.10 14.42
concrete amount for each person but one that varies
Poland 9.59 13.98
from person to person. Moreover, the question asks
India 11.48 13.45
about a lifetime horizon that varies from person to
Thailand 10.85 13.31
person but is concrete to each.
Estonia 10.26 13.30
I also asked a second question identical to the
Finland 10.09 13.09
first except that it focused on replacing an invest-
United States 10.61 12.61
ment portfolio rather than changing a job. In analyz-
Italy 9.50 12.51
ing both questions, I included only people born in
Japan 9.72 12.41
the country where they are residing and excluded
Germany 9.43 12.10
foreign students and others whose culture might be
France 10.33 11.93
different from the predominant culture of a country.
Malaysia 10.46 11.82
The results, shown in Table 2, average the
Norway 9.74 11.74
responses of men and women with equal weight United Kingdom 9.58 11.64
because the ratio of men to women in my sample Switzerland 8.33 11.56
varies among the countries. The average in the Israel 10.95 11.40
United States for the lifetime income (job change) Brazil 10.24 10.62
question was 10.61 percent, which means Ameri- Tunisia 10.64 10.33
cans are willing to “gamble” on their lifetime
income only if the upside (50 percent increase in the Whenever I make a choice, I try to get informa-
standard of living) is approximately five times tion about how the other alternatives turned out
larger than the 10.61 percent downside in the stan- and feel bad if another alternative has done
dard of living. China and Vietnam were the most better than the alternative I have chosen. Rate
willing to take risk, and Germany and Switzerland your level of agreement with this statement on
were the least willing. a scale from strongly disagree to strongly agree.
I found that in every country, with the exception The propensity for regret was highest in Italy,
of Tunisia, people are willing to take more risk with Malaysia, Estonia, and Israel and lowest in Vietnam,
their portfolio than with their income. This might China, and Thailand.
seem odd because the stakes in the two questions I asked about the propensity for maximization:
are the same (50 percent standard of living upside “I always want to have the best. Second best is not
and X percent downside), but the ideas of behav- good enough for me. How much do you agree with
ioral portfolio theory explain the difference in the this statement?” Respondents in Estonia and Israel
responses. Investors tend to think about their agreed the most with this statement, and those in
money in layers, and job income makes up the bot- Taiwan and China agreed the least.
tom layer, the safe money that is delivered every I then explored levels of happiness by asking the
two weeks or every month. Portfolio wealth is in a respondents to rate their level of satisfaction with
layer above job income. One can fall back on job their life on a scale of 1 to 10. People in the United
income if portfolio wealth is diminished. States, Switzerland, Holland, and Norway rated their
Table 3 shows the average scores for each coun- satisfaction the highest. People in Japan, Malaysia,
try’s responses to additional questions in the study and Vietnam rated their satisfaction the lowest.
that go beyond risk. Each score is a mean of men and Finally, I asked a question about trust but mod-
women and includes only people born in the country ified the usual question to exclude family members:
where they are residing. I asked about the propensity “Generally speaking, would you agree that most
for regret, which is sometimes confused with risk. people can be trusted or that you always have to be

40 • SEPTEMBER 2008 ©2008, CFA Institute • cfa pubs .org

 NOT FOR DISTRIBUTION
Countries and Culture in Behavioral Finance

Table 3. Propensities for Regret, Maximiza- Relations between the Variables

tion, Happiness, and Trust The willingness to take risk with both income and
Country Regret Maximization Happiness Trust investment portfolios is significantly correlated.
Brazil 5.92 5.36 6.87 4.08 This is true for both men and women. People who
China 4.58 4.45 6.26 5.98 are willing to take risks with their income are gen-
Estonia 6.39 6.93 7.00 5.07 erally also more willing to take risks in their portfo-
Finland 5.71 5.43 7.58 5.82 lio. The only other variable that is consistently
France 6.00 5.38 7.84 4.52 related in a significant way to the propensity to take
Germany 5.77 5.36 7.12 4.52 income and portfolio risk is trust. Trusting people
Holland 5.98 6.37 7.88 5.89 are not only more willing to invest in stocks, as
India 5.45 6.32 6.87 5.23 Guiso and his colleagues (2007) have found, but also
Israel 6.18 6.82 7.85 5.03 are more willing to take risk.
Italy 7.09 5.94 7.49 4.62 The differences in the scores between men and
Japan 5.73 5.04 6.12 5.17 women are shown in Table 4, which includes the
Malaysia 6.63 6.65 6.04 4.56 responses of all the men and women from all the
Norway 5.57 5.61 7.86 5.39 countries in the survey. Men are more willing than
Poland 5.76 5.70 7.64 4.75 women to take risk with their income and portfolio,
Switzerland 5.45 5.39 7.93 5.16 and the differences are statistically significant. Men
Taiwan 5.81 4.91 6.59 5.76 and women are about equal in their susceptibility to
Thailand 4.17 5.13 6.60 4.94 regret. Men score higher on maximization, but
Tunisia 5.87 6.80 6.71 4.33 women are happier. Finally, women are less trust-
Turkey 5.88 6.14 6.84 3.67 ing than men.
United Kingdom 5.89 6.22 7.30 5.02
United States 5.98 6.24 7.95 5.69 Patterns in the Data
Vietnam 4.60 5.44 5.64 4.18 One idea from behavioral portfolio theory is that
Note: Higher numbers imply higher propensities for regret and investors divide their money into layers, with some
maximization and higher levels of happiness and trust. money for downside protection and some money for
upside potential. So, people who aspire for the
upside are willing to take more risk than people with
careful in dealing with people other than your fam- no such aspirations. Poor people buy more lottery
ily?” China ranked the highest in agreeing that most tickets relative to their income than rich people
people can be trusted. I was surprised by this result because their aspirations are high relative to their
until I learned that China’s social structure is based current situation. The ratio of desire for upside poten-
on a network of not only family but also friends and tial and downside protection varies by country.
I find that people in lower income-per-capita
associates who might provide links to other associ-
countries are not as happy as people in higher
ates who do favors for one another. For example, if income-per-capita countries and have a higher pro-
people need something from a government agency, pensity for risk. I attribute it to greater desire of
they will find someone in their network who knows people in lower income-per-capita countries to
someone at the agency who will help them. move up relative to the desire of people in higher

Table 4. Differences in the Propensities between Women and Men:

Women Are Less Willing to Take Risk, Have a Lower Propensity
for Maximization, Are Happier, and Are Less Trusting
Is the Difference
Statistically
Women Men Difference Significant?
Risk tolerance in income 10.72 11.99 –1.27 Yes
Risk tolerance in portfolio 12.61 14.39 –1.78 Yes
Regret 5.49 5.53 –0.04 No
Maximization 5.53 5.69 –0.16 Yes
Happiness 6.80 6.68 0.12 Yes
Trust 4.95 5.15 –0.20 Yes

©2008, CFA Institute • cfa pubs .org SEPTEMBER 2008 • 41

 NOT FOR DISTRIBUTION
CFA Institute Conference Proceedings Quarterly

income-per-capita countries. Figure 1 shows that
people are happier in countries with higher income
per capita, and Figure 2 shows that people in coun-
tries with lower income per capita, such as China
and Vietnam, have a higher propensity for risk.
Another difference among cultures occurs along the
individualism-collectivism line, investigated by
Geert Hofstede (2001). In individualistic societies,
ties among individuals are loose and all are
expected to look after themselves and their imme-
diate families. In collectivistic societies, individuals
are integrated into strong cohesive in-groups, gen-
erally extended families who protect one another in
exchange for unquestioning loyalty.
A collectivistic group provides its members a
safety net that is absent in individualistic countries.
In their “cushion hypothesis,” Hsee and Weber
(1999) hypothesized that people are more willing to
take risk in collectivistic societies than in individual-
istic societies because they know that the in-group
will provide a cushion if they fail. That cushion is not
as readily available in individualistic societies. The
United States ranks first on individualism among 88
countries ranked by individualism, and people in the
United States are not likely to be surprised by that
ranking. Adult children in the United States do help
parents who fall into poverty but certainly not to the

Figure 1. The Association between Income Per Capita of the People of Various Countries and Their
Levels of Happiness
Level of Happiness
9

Netherlands Switzerland United States

8 Israel France
Poland Finland Norway
Italy
United Kingdom
7 Germany
India Turkey Brazil
Thailand Taiwan
China Japan
6 Malaysia
Vietnam

5
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000
Income Per Capita ($)

Figure 2. The Association between Income Per Capita of the People of Various Countries and Their
Propensity for Risk
Propensity for Risk
18

16
China

14 Vietnam
Taiwan Netherlands

12 Turkey
India
Thailand Israel
Malaysia France United States
10 Brazil Japan Finland
Poland United Kingdom Norway
Italy Germany
Switzerland
8
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000
Income Per Capita ($)

42 • SEPTEMBER 2008 ©2008, CFA Institute • cfa pubs .org

 NOT FOR DISTRIBUTION
Countries and Culture in Behavioral Finance

extent that parents are helped in such countries as
Vietnam and China, where “filial loyalty” is
expected. Vietnam and China rank 65th on the indi-
vidualism scale. Figure 3 shows that people in coun-
tries that rank higher on individualism have a lower
propensity for risk.
Conclusion
The reasons for differences in the propensity for risk
among people of different countries are varied. Peo-
ple in low-income countries have high aspirations
relative to their current income. But it is not that they
like risk. Rather, they pay with risk for a chance to
move up in life. People in collectivistic countries can
afford to take more risk because their in-groups
provide downside protection.
The propensities for risk, regret, and maximiza-
tion vary by country of origin and by gender. Levels
of trust also vary. Risk tolerance in income and
portfolios is related, and risk tolerance is related to
trust. Trusting people are willing to take more risk.
Financial advisers should consider clients’
countries of origin when educating and advising
them. An awareness of the culture that clients come
from is important, and that insight will allow advis-
ers to serve their clients well. Cultures vary, and
culture matters.
This article qualifies for 0.5 CE credits.

Figure 3. The Association between Degrees of Individualism or Collectivism of the People of

Various Countries and Their Propensity for Risk
Propensity for Risk
18

16
China

14 Vietnam
Taiwan Netherlands
Turkey
12 India
Israel United States
Thailand France
10 Malaysia Finland
Brazil Norway
Japan Poland Germany Italy
United Kingdom
Switzerland
8
0 10 20 30 40 50 60 70 80 90 100
Low Individualism (High Collectivism) High Individualism (Low Collectivism)

R EFERENCES
Fisman, Ray, and Edward Miguel. 2006. “Cultures of Corruption:
Evidence from Diplomatic Parking Tickets.” NBER Working
Paper 12312 (June).
Guiso, Luigi, Paola Sapienza, and Luigi Zingales. 2006. “Does
Culture Affect Economic Outcomes?” Journal of Economic Per-
spectives, vol. 20, no. 2 (Spring):23–48.
———. 2007. “Trusting the Stock Market.” CFS Working Paper
2005/27 (May).
Hofstede, Geert. 2001. Culture’s Consequences: Comparing Values,
Behaviors, Institutions and Organizations Across Nations. 2nd ed.
Thousand Oaks, CA: Sage Publications.
Hsee, Christopher K., and Elke U. Weber. 1999. “Cross-National
Differences in Risk Preferences and Lay Predictions.” Journal of
Behavioral Decision Making, vol. 12, no. 2 (May):165–179.
Statman, Meir. 2007. “Local Ethics in a Global World.” Financial
Analysts Journal, vol. 63, no. 3 (May/June):32–41.

©2008, CFA Institute • cfa pubs .org SEPTEMBER 2008 • 43


CFA Institute Conference Proceedings Quarterly
Question and Answer Session
Meir Statman
Question: How would know-
ledge of the variations in appetite
for risk among countries and cul-
tures be applied in the portfolio
management process?
Statman: We tend to assume
that other people share our cul-
ture, but that assumption is not
always true. Financial advisers
need to probe their clients more
about their culture, especially
their sense of obligation toward
others. I’ve seen many financial
plans in which people are
assumed to be saving for them-
selves during their working years
and then living on their savings
during retirement. This individu-
alistic plan might suit many
Americans, but it might not suit
immigrants from collectivistic
countries who feel an obligation
to others even during retirement.
Question: How do you know
that money makes people happy?
Couldn’t it just as easily be inter-
preted to mean that happiness
makes people rich?
Statman: The relationship
between money and happiness
depends on benchmarks or aspi-
ration levels. People who set aspi-
ration levels they can reach with
some effort, such as increasing
their income by improving their
education and jobs, are likely to
enhance both wealth and happi-
ness. But aspiration levels that are
44 • SEPTEMBER 2008
View publication stats
NOT FOR DISTRIBUTION
too high might add wealth with-
out adding happiness. Many peo-
ple who drive Toyotas feel that
they have arrived at their aspira-
tion levels, yet some people don’t
feel they’ve arrived even when
they drive Bentleys.
Question: Although differences
in ethics might be associated with
differences in culture, doesn’t a
country’s legal system ultimately
determine ethics?
Statman: The street from laws to
ethics is a two-way street. That is,
laws reflect ethics and, in turn,
ethics affect laws. The process of
changing ethics and having the
law change with it is lengthy. A
study has shown that the worst
thing a country can do is have a
law against insider trading and
not enforce it, because lack of
enforcement makes a mockery of
the law. But it is difficult to enforce
a law that does not match a soci-
ety’s current perception of ethics.
Question: Did you consider
social security or other types of
government support in the
amount of income and/or port-
folio risk tolerance of a country’s
inhabitants?
Statman: It has occurred to me
that, for example, people are more
willing to take risk in Holland,
which is a very individualistic
country, because they have a
©2008, CFA Institute • cfa pubs .org
safety net in the form of state sup-
port. The safety net in Holland is
quite strong and might provide
the same kind of support that fam-
ily provides in a collectivistic
country such as China. I will defi-
nitely study that link.
Question: What is your view
on why saving rates vary from
culture to culture?
Statman: I think that culture
plays a large role. People save
more in countries where saving is
encouraged by the culture and
norms of saving are transmitted
by parents to children.
Question: With the growth of
global portfolios, is it ironic that
portfolios designed to lower the
degree of risk and enhance the
rate of returns might be perceived
as more risky?
Statman: We think of risk in
terms of standard deviations and
correlations, and in this sense, glo-
bal diversification reduces objec-
tive risk. But subjective risk might
be high if investors do not trust
that they would be treated fairly in
another country. Russian inves-
tors probably trust that they
would be treated fairly in the
United States more than U.S.
investors trust that they would be
treated fairly in Russia.