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Article
Publication date: 31 December 2015

Alan Wong and Bernie Carducci

The purpose of this paper is to determine relationships between financial risk tolerance and the personality traits of sensation-seeking, locus of control, ambiguity…

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1131

Abstract

Purpose

The purpose of this paper is to determine relationships between financial risk tolerance and the personality traits of sensation-seeking, locus of control, ambiguity tolerance, and financial dishonesty.

Design/methodology/approach

A pretested questionnaire was used to gather information from 255 respondents. With risk tolerance as a criterion variable and the four personality traits as predictor variables, a regression procedure was performed to determine which variables contributed to the variability of the criterion variable and the extent of such contribution. An analysis was also done to find out whether gender, age, GPA, and academic standing had an influence on each personality trait’s contribution to risk tolerance.

Findings

Risk tolerance is directly related to sensation-seeking and the link is so strong that it is not mitigated by the effects of gender, age, GPA, and college academic standings. As for locus of control, the more one believes one has control over one’s outcome, the higher risk one can tolerate. Surprisingly, there is no relationship between risk and ambiguity tolerances. Dishonesty also does not affect risk tolerance behavior. However, the relationship is found to exist among younger individuals and those with lower GPA, possibly due to not having reached an adequate level of matured or critical reasoning yet.

Originality/value

The relationship between risk tolerance and sensation-seeking is an established fact but whether the relationship still holds across several demographic groups is part of this study’s focus. Although much has been done on risk tolerance, very little has been done on its relationship to locus of control, ambiguity tolerance, and financial dishonesty.

Details

Managerial Finance, vol. 42 no. 1
Type: Research Article
ISSN: 0307-4358

Keywords

Open Access
Article
Publication date: 2 June 2020

Andrea Lippi and Simone Rossi

This paper sets out to corroborate the existing literature on investors' risk tolerance and to assess how the 2008 financial crisis has affected risk tolerance among…

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1139

Abstract

Purpose

This paper sets out to corroborate the existing literature on investors' risk tolerance and to assess how the 2008 financial crisis has affected risk tolerance among Italian investors.

Design/methodology/approach

Based on a unique dataset of real-world portfolio choices made by 1,245 Italian investors over a period of 15 years (from 2003 to 2017), this paper presents two steps of analysis. In step 1, the whole period 2003–2017 is considered with the aim to integrate and corroborate the existing literature on the topic of risk tolerance, considering a complete economic and financial cycle. Step 2 took 2008 as the pivotal point between pre-crisis (2003–2008) and crisis (2009–2017) with the aim to observe the influence on risk appetite of the economic and financial effects of the crisis.

Findings

The results obtained confirm that men are more risk tolerant than women and older people are less risk-taking than their younger counterparts, although the relationship between age and risk tolerance is not necessarily linear. Moreover, our paper demonstrates that a crisis scenario has an influence on Italian investors' risk tolerance.

Practical implications

Our results are of interest to financial advisors, financial planners, asset managers, psychologists, behavioral researchers and more in general to providers of financial products and services.

Originality/value

The results presented in this paper are relevant and original because they are based on real investors who made real choices concerning their portfolio asset allocations.

Details

International Journal of Bank Marketing, vol. 38 no. 5
Type: Research Article
ISSN: 0265-2323

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Article
Publication date: 3 October 2016

Tchai Tavor and Sharon Garyn-Tal

This research aims to examine the decision-making process involved in saving for retirement and compare it with decision-making processes regarding other financial…

Abstract

Purpose

This research aims to examine the decision-making process involved in saving for retirement and compare it with decision-making processes regarding other financial products (such as loans and savings plans) as well as real products (such as a car or a home).

Design/methodology/approach

This research is based on the distribution of 107 questionnaires. The questionnaire is composed of two parts: questions examining and focusing on the individual’s decision-making process and questions regarding socioeconomic factors. The average level of risk tolerance is calculated for each respondent with respect to the first four chapters. (These chapters include buying a car or a home, opening a savings plan and taking a loan). Afterward, the consistency (rationality) of the respondents is examined with regard to their decision-making concerning retirement savings plans. Then, an econometric model is used to further test the consistency of the respondents.

Findings

The results suggest that the level of risk tolerance associated with a retirement savings plan is consistent with that associated with the other financial products, but not with the real products. Majority of the respondents demonstrate high risk tolerance with respect to retirement savings, and their decision-making process is similar to a random thinking process. The level of deliberation and information-gathering regarding retirement savings is the lowest when compared with the other financial and real products examined in this paper. Majority of the respondents are less risk-tolerant toward the other financial and real products.

Originality/value

In this research, the authors examine how different individuals with different characteristics get different decisions about their personal retirement savings. The authors also examine these decisions’ deviation from the rational model, and compare it with decision-making processes regarding other financial products as well as real products.

Details

Studies in Economics and Finance, vol. 33 no. 4
Type: Research Article
ISSN: 1086-7376

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Article
Publication date: 13 June 2016

Shaista Wasiuzzaman and Siavash Edalat

The vast amount of information available via online social networks (OSN) makes it a very good avenue for understanding human behavior. One of the human characteristics of…

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1057

Abstract

Purpose

The vast amount of information available via online social networks (OSN) makes it a very good avenue for understanding human behavior. One of the human characteristics of interest to financial practitioners is an individual’s financial risk tolerance. The purpose of this paper is to look at the relationship between an individual’s OSN behavior and his/her financial risk tolerance.

Design/methodology/approach

The study uses data collected from a sample of 220 university students and the backward variables selection ordinary least squares regression analysis technique to achieve its objective.

Findings

The results of the study find that the frequency of logging on to social network sites indicates an individual who has higher financial risk tolerance. Additionally, the increasing use of social networks for social connection is found to be associated with lower financial risk tolerance. The results are mostly consistent when the sample is split based on prior financial knowledge.

Originality/value

To the authors’ knowledge this is the first study which documents the possibility of understanding an individual’s financial risk tolerance via his/her social network activity. This provides investment/financial consultants with more avenues for gathering information in order to understand their current or potential clients hence providing better services.

Details

Managerial Finance, vol. 42 no. 6
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 15 August 2016

Hunter Matthew Holzhauer, Xing Lu, Robert McLeod and Jun Wang

Currently, few academics agree on a standard and scientific way to measure risk tolerance. This paper aims to create a unique model for empirically measuring risk tolerance

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1378

Abstract

Purpose

Currently, few academics agree on a standard and scientific way to measure risk tolerance. This paper aims to create a unique model for empirically measuring risk tolerance and to make a strong contribution to the growing literature in risk tolerance and risk management.

Design/methodology/approach

The authors use factor analysis and regression analysis to identify relevant factors for measuring risk tolerance.

Findings

The risk tolerance model is based on the acronymed model riskTRACK, which includes the five significant factors this paper identifies for measuring risk tolerance: traditional risk factor, reflective risk factor, allocation risk factor, capacity risk factor and knowledge risk factor.

Research limitations/implications

Uses for future research streams devoted to risk tolerance and risk management.

Practical implications

The results also have practical applications for the financial services industry, particularly risk management, portfolio management and financial planning.

Originality/value

In sum, this research expands previous research in risk tolerance and also adds to the growing literature in risk management. Once again, this paper is unique in that the authors develop a valid and reliable risk tolerance model based on five specific factors for measuring risk tolerance.

Details

The Journal of Risk Finance, vol. 17 no. 4
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 21 December 2020

Dewan Muktadir-Al-Mukit

The study attempts to assess the relationship between sociodemographic factors and the risk tolerance level of stock market investors reflected by their trading behavior…

Abstract

Purpose

The study attempts to assess the relationship between sociodemographic factors and the risk tolerance level of stock market investors reflected by their trading behavior from the perspective of developing market economy.

Design/methodology/approach

The study collected data from a survey on capital market investors in Bangladesh. Portfolio beta has been used as a dependent variable to measure the risk tolerance level where total 11 sociodemographic factors have been used as independent variables.

Findings

Among all study variables, three sociodemographic factors are found to be significant in differentiating the risk tolerance level of the stock market investors. The author finds that the risk tolerance level of stock market investors significantly varies according to marital status, family size and financial responsibility.

Practical implications

As sociodemographic characteristics provide a basis in assessing the investor risk tolerance level in the context of developing market economies, the study suggests that stock market related policy and investment management planning process should be formulated by incorporating behavioral aspects of the retail investors.

Originality/value

This study has the potential to contribute to the behavioral finance literature by showing how and at what extent sociodemographic factors may influence the risk tolerance level of stock market investors in developing countries, where sociodemographic factors are considered to be more dominating than the normative portfolio selection procedure because of lacking in investors' financial literacy and due to the presence of a weak regulatory as well as institutional framework. Further, apart from identifying and comprehensively incorporating all possible sociodemographic factors, this study uses portfolio beta as a new objective measure for financial risk tolerance, which overcomes the problem of subjective and other risk tolerance measurement in the existing literature.

Details

South Asian Journal of Business Studies, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 2398-628X

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Article
Publication date: 22 April 2010

Jeremy Moore, James Felton and Colby Wright

We analyze the correlation between the political orientation of investors and their financial risk tolerance. Assessing financial risk tolerance is a very important aspect…

Abstract

We analyze the correlation between the political orientation of investors and their financial risk tolerance. Assessing financial risk tolerance is a very important aspect to developing an appropriate long‐term investing strategy. Our study is based on a sample of 129 undergraduates at Central Michigan University during one academic year. We employ a two‐axis political compass to determine the political orientation of our study participants. We determine their financial risk tolerance by analyzing their portfolios and trading behavior in a simulated investment game in a semester long course. We report two main findings: (1) financial risk tolerance is highest for those with more conservative economic political views and (2) financial risk tolerance is highest for those with more centrist social political views. We believe our results can help investment advisors and individual investors better assess individual financial risk tolerance through the use of the two‐axis political compass utilized in our study.

Details

American Journal of Business, vol. 25 no. 1
Type: Research Article
ISSN: 1935-5181

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Article
Publication date: 18 January 2022

Peter Brous and Bo Han

This paper examines students' decisions when playing an in-class version of the TV game, Deal or No Deal (DOND), to study the relation between personal characteristics and…

Abstract

Purpose

This paper examines students' decisions when playing an in-class version of the TV game, Deal or No Deal (DOND), to study the relation between personal characteristics and individual decision-making under risk.

Design/methodology/approach

This study analyzes DOND game play data collected from 374 students in 13 university finance classes, and their personal characteristics collected in a post-game survey. It uses ordered probit, OLS and probit regression analysis to examine the impact of personal characteristics on an individual's risk tolerance.

Findings

The key finding is that international students are significantly more risk averse than US domestic students. Additionally, given the natural control for age and education, the study finds that gender, race and religion have a limited impact on an individual's risk tolerance. Finally, the study provides evidence that the structure of the DOND game, in general, rewards risk-taking as long as it is not excessive. Once participant behavior becomes risk-seeking, the correlation between risk-taking and game payoff becomes negative.

Research limitations/implications

The homogeneous set of contestants (business students) analyzed in this study presents some limitations yet provides opportunities to examine risk tolerance differences between the US and international students, and whether gender, race or religious affiliation has an impact on the level of risk tolerance given a natural control for age and education level.

Practical implications

The evidence suggests that culture and environmental unfamiliarity may impact an individual's risk tolerance. This finding is useful when providing financial advice to diverse clients or when conducting international business. Additionally, understanding that education and financial literacy reduces differences in risk tolerance across gender, race and religion can impact the way we interact with others. A broader practical implication for all investors is that, while under normal circumstances, risk-taking is rewarded with a higher expected return, excessive risk-taking may harm their investment performance.

Originality/value

This paper utilizes a unique data set, collected through a class activity and post-class survey. While there have been empirical studies using DOND data, this is the first study that examines the impact of personal characteristics on game participants' behavior, thereby generating unique findings not reported in previous studies employing DOND data.

Details

The Journal of Risk Finance, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1526-5943

Keywords

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Article
Publication date: 30 April 2021

Linh Thi My Nguyen, Phong Thanh Nguyen, Quynh Nguyen Nhu Tran and Thi Tuong Giang Trinh

The purpose of this study is to examine a mechanism through which subjective financial literacy can exert negative effects on the retirement saving intention and…

Abstract

Purpose

The purpose of this study is to examine a mechanism through which subjective financial literacy can exert negative effects on the retirement saving intention and behaviors, which has not been well understood in prior research. Particularly, the authors draw on the relevant risk literature to introduce financial risk tolerance and risk perception as important mediators that transfer subjective financial literacy into reduced retirement saving intention which in turn affects the saving behaviors.

Design/methodology/approach

The authors test the model with a sample of 347 adults using factor analysis and structural equation modeling.

Findings

Consistent with the notions about the negative side of subjective financial literacy, the authors find supporting evidence for the proposed indirect effects of financial literacy on retirement saving intention via risk tolerance and risk perception. In addition, the authors observe that an individual's retirement saving intention strongly predicts their retirement saving behaviors.

Originality/value

The study offers insights into the mechanisms that subjective financial knowledge might also inhibit individual's responsible financial behaviors (e.g. retirement saving).

Details

Review of Behavioral Finance, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1940-5979

Keywords

Open Access
Article
Publication date: 1 November 2021

Pendo Shukrani Kasoga

The purpose of this research is to examine the effect of heuristic biases on investment decisions through multiple mediation mechanisms of risk tolerance and financial…

Abstract

Purpose

The purpose of this research is to examine the effect of heuristic biases on investment decisions through multiple mediation mechanisms of risk tolerance and financial literacy in the Tanzanian stock market.

Design/methodology/approach

A sample of 316 individual investors in the Tanzanian stock market was obtained through questionnaires. The data were analyzed using structural equation modeling (SEM).

Findings

The findings show that financial literacy mediates insignificantly the effects of overconfidence, availability, anchoring and representativeness heuristics on investment decisions. Further, financial literacy does not influence the effect of risk tolerance and investment decisions. Risk tolerance is confirmed as a positive mediator of overconfidence, availability, anchoring and representativeness heuristics in investment decisions. Also, the study shows that overconfidence exerts a stronger influence on investment decisions, followed by availability, representativeness, risk tolerance, anchoring and financial literacy.

Research limitations/implications

The study deals with real investors. Therefore, it uses fewer items to measure the constructs in order to avoid respondent bias. Further research could examine the effects of heuristic biases on investment decisions by adding or modifying the items of particular constructs and studying institutional investors.

Practical implications

The findings can help individual investors to analyze and evaluate their behavior toward stock selection. Securities institutions can use this research to understand investors' behavior, evaluate future market trends and provide advice to the investors.

Originality/value

Previous studies have examined the impact of heuristics on the investment decisions of individual investors. The unique empirical analysis developed in this paper is that it examines the multiple mediation mechanisms of risk tolerance and financial literacy with respect to heuristic biases and investment decisions in the Tanzanian stock market.

Details

Journal of Money and Business, vol. 1 no. 2
Type: Research Article
ISSN: 2634-2596

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