Practical Applications of Psychological Antecedents of Financial Risk Tolerance

Abstract

In Psychological Antecedents of Financial Risk Tolerance, from the Fall 2020 issue of The Journal of Wealth Management, authors Heena Thanki, Anushree Karani (both of Shri Jairambhi Patel Institute of Business Management and Computer Applications in Gujarat, India), and Anil Kumar Goyal (of Rukmini Devi Institute of Advanced Studies in New Delhi, India) analyze how psychological and behavioral factors influence financial risk tolerance (FRT) among investors. Past research has focused on how investors’ socioeconomic status, demographic characteristics, and personality types influence their FRT. But the authors say such studies may be of limited value since they do not consider financial satisfaction, financial anxiety, self-esteem, sensation-seeking behavior, and obsession with money.

The authors surveyed nearly 400 investors to assess the correlations between these factors and FRT. They found that people who are more satisfied with their financial situation tend to have lower FRT. People who have higher self-esteem or engage in sensation-seeking behavior, and those with Type A personalities, tend to have higher FRT. Obsession with money shows only a weak correlation with FRT. The authors conclude that policymakers and financial advisors should consider such psychological and behavioral factors when deciding what risk level is suitable for investors.