Risk Tolerance, Time Preference and Financial Decision-Making: Differences between Self-Employed People and Employees

Abstract

This study analyzes the differences between salaried employees and self-employed people, in terms of risk tolerance, time preference, and choice of financial investment channels. Both groups completed research questionnaires designed to elicit responses relevant to these questions. Analysis of the results shows that self-employed people have less risk aversion and a stronger future preference. These preferences are consistent with independent work, where the fruits of success can sometimes be harvested only after a long period of time; the risks are greater, and the level of uncertainty is higher. The subjects were also asked to choose investment channels for different amounts of money. Both self-employed people ‎and employees chose less risky investment channels as the amounts increased. However, the self-employed people ‎chose riskier investment channels than the employees. This decision-making tendency is clearly reflected in their choice of occupation, risk tolerance and time preference. This study can increase the self-employed people’s awareness ‎of the characteristics that influence their financial decision-making. In addition, there is now a trend for investment advisors to focus on the psychological and demographic characteristics of clients when advising them regarding the composition of their investment portfolios. This study shows that the client’s occupation can be an important factor that ought to influence composition of the portfolio, potentially improving client satisfaction.