All Seniors Aren’t Risk-Averse

As India transitions towards a defined contribution (DC) system like the National Pension System (NPS), the burden of retirement security is shifting from the state and employers directly onto the shoulders of citizens. While this gives you more control, it also exposes you to a major hidden risk: “one-size-fits-all” investment strategies. A recent research paper, which I co-authored with Jairaj Jatar, Sid Muralidhar and Kulin Patel, argues that the current global gold standard—Life Cycle Funds that automatically reduce risk as you age—is built on a fundamental misunderstanding of how Indians actually think about money.

The Flaw In The Life Cycle Fund Logic

Most modern pension systems, including those in the US, Hong Kong, and Ireland, rely on the assumption that age is the primary driver of risk tolerance. The theory is simple: the older you get, the more conservative you should become. However, a survey and analysis we conducted recently on a sample of Indian citizens reveals that for the Indian population, this central pillar is “built on sand”.

Using a unique behavioural framework called Risktyle—an extension of the Nobel Prize-winning work of Daniel Kahneman and Amos Tversky—we surveyed 172 diverse Indian respondents (nearly double the size of the Kahneman-Tversky sample). The survey suggests that age produces no statistically significant differences in risk preferences in India, so age-based pension design may not be the answer. Whether a respondent was in their 20s or 70s, their appetite for risk remained remarkably consistent. This means that forcing an older investor into a “safer” low-yield fund purely based on their birthday might be systematically mis-serving them. So, if not age, what then?

The Risk-Seeking Indian Investor

One of the most striking findings is that Indians are considerably more risk-seeking than their counterparts in the US and other global samples.

While traditional economic models assume individuals are naturally “risk-averse”, the Indian cohort leaned heavily toward risk-seeking behaviour. To make the research relatable, the study used “gamified” questions tailored to the Indian context. Instead of bland math problems in the Kahneman-Tversky paper, respondents made choices involving Diwali melas, cricket matches, and traditional card games. The results showed that only 29 per cent of responses aligned with the original 1979 Israeli student-based study by Kahneman and Tversky, suggesting that western behavioural theories cannot be blindly imported into the Indian market.

Beyond Age: The Labels That Actually Matter

If age isn’t the deciding factor, what is? The study found that other “labels”, such as geography, religion, and occupation, are far more accurate predictors of how Indians handle financial risk.

• The North-South Divide: Geography emerged as a powerful differentiator. North Indians were found to be significantly less risk-seeking than those from the South and West, particularly when it comes to dealing with potential losses.

• The Gender Gap On Losses: While men and women have similar appetites for “gains”, men are measurably more risk-seeking when it comes to potential losses.

• Occupation And Education: Retirees were, predictably, the most risk-averse group, likely due to their dependence on fixed incomes. On the other hand, homemakers surprisingly emerged as the risk-seeking cohort. Furthermore, overall education level significantly impacted how individuals viewed “upside” risk, with degree holders showing different patterns than those holding diplomas.

• Religious Nuances: In one of the most dramatic (though preliminary) findings of the study, Muslim respondents (though it is a small sample size) were statistically distinct from every other religious group, registering as the most risk-seeking cohort in the sample.

Need For A BhARaT Approach

As Pension Fund Regulatory and Development Authority (PFRDA) strives to improve retirement security, it should ensure that financial institutions move beyond simplistic age-based defaults. We recommend that India consider applying BhARaT (Behavioural Assessment of Retirement Risk Tolerance). This would involve using technology to create customised or segmented investment products that reflect an individual’s actual behavioural DNA rather than their birth year.

We also found that the primary choice of asset is a strong “revealed preference” for desired risk tolerance. For instance, those who primarily save in fixed deposits (FDs) are statistically the most risk-averse, while direct stock purchasers occupy the opposite end of the spectrum.

A one-size-fits-all default is poorly suited for a population that already signals such diverse risk tolerance through their current saving habits.

The Road Ahead

While this study provides a wake-up call, we acknowledge that with a country of 1.5 billion people, more data is needed. A nationally representative survey to validate these findings is a must. Moreover, regulators like PFRDA must ensure that the design of pension products fits the purpose. As India’s financial landscape evolves, individualised, behaviourally-informed advice is no longer a luxury; it is a necessity for long-term security.

By Arun Muralidhar, Co-Founder, MCube Technologies