When It Comes To Cross-Cultural Predictions, Your Best Guess May Not Be Good Enough
Research by Christopher K. Hsee
"Don't judge a book by its cover" is a universal
adage, but many business people do exactly that when speculating
about foreign cultures. Relying on cultural stereotypes to
make predictions about the behavior of foreign business partners
is outdated and unreliable, and in the era of multinational
business, it is one of the surest ways to sabotage negotiations
In the study "Cross-national Differences in Risk Preferences
and Lay Predictions for the Differences," University
of Chicago Graduate School of Business professor Christopher
K. Hsee and Elke U. Weber of Columbia University present evidence
that even some of our most basic stereotypes-such as generalities
about Asian versus Western cultures-are inaccurate, and that
relying on these stereotypes can lead us to misjudge the decisions
of foreign counterparts.
Hsee and Weber examine whether American and Chinese respondents
could accurately predict the "risk preferences"
of their counterparts.
Risk preference is defined as one's tendency to choose a
risky option (such as an investment that has equal chances
to yield a 20 percent return or a 0 percent return), or a
safe option of an equal or lower expected value (such as an
investment with a guaranteed return of 5 percent).
Although researchers have compared Chinese with Americans
in many decision-related topics, little is known about how
Chinese differ from Americans in their risk preference or
how people formulate predictions of the risk preference of
The authors chose to compare the two countries for many reasons,
including the fact that on issues such as traditional values
and current political systems, the United States and China
stand on almost opposite ends of the continuum and respectively
represent Western and Eastern values. Also, both countries
wield significant impact on the world economy.
Results from the study showed that both the Americans and
the Chinese predicted that the Americans would be more willing
to take risks. The Americans underestimated the Chinese propensity
to seek risk, and the Chinese overestimated the Americans'
willingness to take risks.
Contrary to these predictions, the authors found that the
American participants were considerably more risk-averse than
"We are talking about relative terms," says Hsee.
"We do not imply that the Americans are not risk-seeking
enough or that the Chinese are not prudent enough. We do not
draw conclusions about what is the optimal level of risk-seeking.
Maybe the Chinese are too risk-seeking, or maybe the Americans
are too risk-averse."
The Coin Toss
To measure the risk preference between the two cultures,
the authors provided university students from China and America
with questionnaires that offered a series of choices between
sure options and risky options. For example, respondents were
asked to choose between receiving a fixed sum of $400 or flipping
a coin and receiving either $2,000 or $0 depending on the
outcome of the coin flip. In another study, respondents were
asked to choose between a safe investment option (with a fixed
4 percent return) and a riskier investment option (with an
uncertain return rate ranging from 0 to 8 percent).
In both studies the Chinese respondents were more inclined
to take the risky option than the American respondents.
To determine whether participants can accurately judge the
risk preference of other cultures, respondents in the first
study were also asked to predict how their counterparts from
the other country would react in the outlined situations.
Both Americans and Chinese participants believed the Americans
would be more willing to choose the risky option. This prediction
directly contradicts the actual risk preference.
Cushion or Opportunity
To explain why the Chinese are more risk seeking than the
Americans, the authors explored two possible hypotheses: the
"cushion" hypothesis and the "opportunity"
The cushion hypothesis is based on findings in previous research
that individualistic cultures such as the United States emphasize
personal freedom and independence, and collectivist societies
such as China endorse social relatedness and interdependence
with family and community. The cushion hypothesis is also
based on an idea for which Weber has found ample empirical
support, namely, that differences in risk preference can occur
because individuals have different perceptions of the dangers
of a risky option. In other words, depending on the country
in which an individual gained his or her cultural beliefs
and attitudes, this individual may perceive the same risky
option to involve more (or less) risk than someone from a
"Compared with those in an individualistic society,"
say Hsee and Weber, "people in a collectivist society
may be more likely to receive help if they are in need. As
a result, the adverse outcome of a risky option may not seem
as severe to them. They appear to be less risk averse. People
in a collectivist culture feel that they are 'cushioned' in
case they fall, which is why we call it the cushion hypothesis."
Follow-up work by the authors has confirmed the prediction
of the cushion hypothesis. The Chinese do perceive the risks
involved in risky financial decisions to be less severe than
their American counterparts.
The "opportunity hypothesis" is related to the
current economic situations of the two countries and focuses
on differences in their attitudes toward risk.
"China today is very much like America during the Gold
Rush period," says Hsee. "The economy is developing
rapidly, and many people benefit from taking great risks.
This is less true for people in countries with well-developed
economies such as the United States. Americans today may not
find it beneficial to take unnecessary risks."
Why then do both the Americans and the Chinese make the wrong
predictions about the risk preference of their counterparts
in the other country? The authors suggest that people often
base their predictions on stereotypes. Ubiquitous mass media
images which influence our view of cultures tend to promote
the stereotype of the risk-seeking, independent American.
Popular Chinese stereotypes reflect more cautious, conservative
and collectivist characteristics, even when they originate
in Chinese-made productions.
The cultural stereotype about Chinese risk aversion may have
been correct at some point, suggest Hsee and Weber, but it
lags behind current social and economic activities that are
reshaping the country and its identity. The same may be true
of the American risk-seeking stereotype. The authors cite
research that highlights changes in the American social and
political landscape since the 1960s that may have affected
American attitudes toward risk in the direction of less public
trust and greater individual caution.
Hsee and Weber found that when respondents tried to factor
in cultural differences when predicting the risk preference
of people in another country, they did so incorrectly, and
therefore, they were not able to make accurate cross-cultural
predictions of risk preference.
Hsee and Weber's findings can be used to examine general
cultural stereotypes. International business people should
ask themselves: Are there differences in my attitudes toward
risk compared with the attitudes of my foreign partners? Can
I accurately predict their decisions?
"In business negotiations between parties from different
cultures with different risk preferences, there is greater
potential for an integrative bargaining solution if these
parties have accurate beliefs about the other party's risk
preference," says Hsee.