The IUP Journal of Applied Finance
Measuring Financial Risk Tolerance: The Role of Socio-Demographic Factors Under the Influence of Attitude Towards Money

Article Details
Pub. Date : Jan, 2020
Product Name : The IUP Journal of Applied Finance
Product Type : Article
Product Code : IJAF20120
Author Name : Pragati Hemrajani, Shiv Kumar Sharma
Availability : YES
Subject/Domain : Finance
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No. of Pages : 22

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Abstract

In this paper, a conceptual model of individual's financial risk tolerance is described. The study, among the first, has incorporated 'attitude towards money' as an interacting variable in predicting the relationship between socio-demographic factors and financial risk tolerance. Using a sample of 219 individual investors, it was determined that the interaction effects significantly predicted the relationship between socio-demographic influences and financial risk tolerance, thereby expanding a new perspective to the literature.


Description

The degree of volatility one prefers in his investment largely depends on an individual's risk appetite. Today, the most crucial and difficult task for financial engineers is to identify and understand his/her client's tolerance towards risk. While assessment of risk tolerance is a key driver to design and formulate customized investment portfolios, the variable has often been overlooked by stakeholders. Moreover, in the recent past, researchers relied only on sociodemographic factors as determinants of financial risk tolerance (Goodall and Corney, 1990), while psychologists debated for presence of psychological predictors. These differences of opinions led to the development of varied academic professions determined to work upon the same contextual phenomena but using different methodologies and predictors and explored the combined effects of demographic, socioeconomic and psychological factors in predicting financial risk tolerance, yet their results lack consensus (Wong and Carducci, 1991; Carducci and Wong, 1998; and Grable and Joo, 1999 and 2000). Also, there is little research devoted to understanding the causality from personal characteristics through attitude towards money to risk tolerance (O'Neill et al., 2005). Therefore, the present study is motivated to fill this gap utilizing a mix of socio-demographic and psychological influences in predicting financial risk tolerance. It deals most specifically with the interactions of the psychological factor in predicting the association between socio-demographic factors and financial risk tolerance. The present study is expected to add value to the extant literature in a meaningful way.


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