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“Tough Guy” vs. “Cushion” hypothesis: How does individualism affect risk-taking?

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  • Illiashenko, Pavlo
Abstract
Corporate finance literature reports a positive association between the cultural dimension of individualism and firm risk-taking, assuming that national culture directly affects the decision-making of corporate executives (tough guy hypothesis). In contrast, studies that link individualism and risk-taking at the individual level find that individuals in collectivistic societies tend to take greater risks (cushion hypothesis). These findings are difficult to reconcile since both strands of literature have important limitations. While findings from corporate finance literature might be not robust to alternative explanations, behavioral finance studies rely on a small number of countries in their respective samples. This study contributes to the second strand of literature by testing the prediction of cushion hypothesis on the individual-level data from three different sources that cover 25, 49, and 41 countries respectively. The cumulative evidence indicates that, consistent with the cushion hypothesis, the link between the individualism and risk-taking is negative.

Suggested Citation

  • Illiashenko, Pavlo, 2019. "“Tough Guy” vs. “Cushion” hypothesis: How does individualism affect risk-taking?," Journal of Behavioral and Experimental Finance, Elsevier, vol. 24(C).
    • Handle: RePEc:eee:beexfi:v:24:y:2019:i:c:s2214635019300115
    DOI: 10.1016/j.jbef.2019.04.005
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    4. Gangi, Francesco & Mustilli, Mario & Varrone, Nicola & Graziano, Domenico, 2023. "Target firms’ characteristics and the effects of sovereign wealth funds’ investments: Does cultural context of SWFs matter?," Research in International Business and Finance, Elsevier, vol. 65(C).
    5. Ooi, Chai-Aun & Hooy, Chee-Wooi, 2022. "Muslim CEOs, risk-taking and firm performance," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).
    6. Matteo M. Marini, 2022. "Does gender moderate the influence of emotions on risk-taking? A robustness check," Working Papers 2022/04, Economics Department, Universitat Jaume I, Castellón (Spain).
    7. Dee Warmath & Pan‐Ju Chen & John Grable & Eun Jin Kwak, 2021. "Soft landings: Extending the cushion hypothesis to financial well‐being in collectivistic cultures," Journal of Consumer Affairs, Wiley Blackwell, vol. 55(4), pages 1563-1590, December.

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    More about this item

    Keywords

    National culture; Individualism; Risk-taking;
    All these keywords.

    JEL classification:

    • D10 - Microeconomics - - Household Behavior - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • Z10 - Other Special Topics - - Cultural Economics - - - General

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