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

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.