Financial Risk Tolerance: A Literature Review

Abstract

The construct of risk tolerance or an individual's attitude towards accepting risk has implications for financial service providers as well as investors. The financial service providers should be aware of the attitude and needs of their clients, including their investment objectives, investment experience and desired financial risk tolerance. A proper assessment of prospective investor's financial risk tolerance enables designing a heterogeneous but appropriate product mix of investment options, which aids in offering customised asset composition in a portfolio such that it is in accordance with the risk and return expectations of an individual. A number of studies have provided evidence of demographic and non-demographic characteristics related to the financial risk tolerance of individuals. The objective of this paper was to prepare a research summary on the basis of the findings of various research projects, which were designed to find out the impact of various demographic and socio-economic factors on financial risk tolerance. There has been plenty of research on impact of demographic and socio-economic determinants on financial risk tolerance. The review of literature suggests there is a persistent belief among practitioners and researchers that (a) older individuals are less risk tolerant than younger people, (b) men are more risk tolerant than women, (c) single individuals are more risk tolerant than married individuals and more number of dependents leads to decreased risk tolerance, (d) those employed professionally are more risk tolerant than non-professionals and self-employed individuals are more risk tolerant than salaried individuals, (e) individuals with greater income have greater risk tolerance than lower income earners, (f) greater educational attainment is associated with increased risk tolerance, (g) increased knowledge of personal finance leads to increased risk tolerance and (h) greater economic expectations are associated with greater levels of risk tolerance.