Mediation between financial risk tolerance and equity ownership: assessing the role of financial knowledge underconfidence

Abstract

Investing in equity is not an easy task. People with varying levels of financial risk tolerance would demonstrate a different level of equity investment. However, investors' tendency to underestimate their financial knowledge is likely to mediate the association between financial risk tolerance and equity ownership since people tend to underestimate their knowledge and take a lower risk when the task is hard to execute. The purpose of the study is to evaluate the mediating role of underconfidence on the association between financial risk tolerance and equity ownership. Confirmatory factor analysis (CFA) and structural equation modeling (SEM) were used to evaluate the conceptual model. The results show that it is possible to assess underconfidence using objective and subjective financial knowledge, and underconfidence has a significant mediating effect between financial risk tolerance and equity ownership. Although it is challenging to change a person’s risk tolerance, financial services professionals may help their clients by addressing underconfidence.