The Effect of Demographic Characteristics on an Individual’s Financial Risk Tolerance

Abstract

This study was designed to build a comprehensive model of financial risk tolerance (FRT) using a number of demographic variables from a large, nationally representative dataset, the Survey of Consumer Finances (SCF) 2016. Linear regression was used to confirm relationships between income, education, financial knowledge, age, marital status, employment status, and race/ethnicity with subjective FRT. All seven variables were found to be significant determinants of FRT, with income, education, and financial knowledge showing positive relationships and age showing a negative relationship. Effects of marital status, employment status, and race/ethnicity varied with the specific measure of subjective FRT used, but generally single males were found to be more risk tolerant than married couples and single females, the self-employed demonstrate higher risk tolerances than those who are employed by someone else or not employed, and there are significant but inconsistent differences in risk tolerance between whites, blacks/African Americans, and Hispanics/Latinos. This study evaluates both the traditional measure of FRT collected by the SCF and the new measure introduced in the 2016 survey year, and I conclude that even within a single survey, subjective measures of FRT are inconsistent.