A test of the relationship between self-classified financial risk-tolerance and investment risk-taking behaviour

Abstract

The purpose of this study was to determine how accurately individuals judge their own level of financial risk-tolerance and whether self-assessed financial risk-tolerance is associated with investment risk-taking behaviours. Using a sample of internet risk-assessment survey respondents (n = 1,740), it was concluded that individuals do a fair job of assessing their own level of financial risk-tolerance using self-classifications into one of four levels of risk-tolerance (r = 0.50 with risk-tolerance test score). Moreover, this self-classification was associated with actual risk-taking investing behaviours. Individuals who saw themselves as real risk avoiders or cautious when making investments tended to hold more cash than riskier assets like equities. Conversely, individuals who viewed themselves as gamblers or being willing to take risks after completing adequate research had larger holdings in equities.