Title: A test of the relationship between self-classified financial risk-tolerance and investment risk-taking behaviour

Authors: John Grable, Michael Roszkowski, So-Hyun Joo, Barbara O'Neill, Ruth H. Lytton

Addresses: Kansas State University, 303 Justin Hall, FSHS, Manhattan, KS 66506, USA. ' Office of Institutional Research, La Salle University, 1900 West Olney Avenue, Philadelphia, PA 19141 1199, USA. ' Inha University, 253 Yonghyun-dong, Nam-gu, Incheon 402 751, South Korea. ' Rutgers Cooperative Research and Extension, Cook College Office Building Room 107, 55 Dudley Road, New Brunswick, NJ 08901, USA. ' Virginia Tech, 101 Wallace Hall, Blacksburg, VA 24061, USA

Abstract: The purpose of this study was to determine how accurately individuals judge their own level of financial risk-tolerance and whether self-assessed financial risk-tolerance is associated with investment risk-taking behaviours. Using a sample of internet risk-assessment survey respondents (n = 1,740), it was concluded that individuals do a fair job of assessing their own level of financial risk-tolerance using self-classifications into one of four levels of risk-tolerance (r = 0.50 with risk-tolerance test score). Moreover, this self-classification was associated with actual risk-taking investing behaviours. Individuals who saw themselves as real risk avoiders or cautious when making investments tended to hold more cash than riskier assets like equities. Conversely, individuals who viewed themselves as gamblers or being willing to take risks after completing adequate research had larger holdings in equities.

Keywords: financial risks; investing; investment suitability; risk assessment; risk tolerance; financial risk taking; self-classification.

DOI: 10.1504/IJRAM.2009.025929

International Journal of Risk Assessment and Management, 2009 Vol.12 No.2/3/4, pp.396 - 419

Published online: 25 May 2009 *

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