From Risk Preferences to Portfolios: Comparing SCF Risk Scales and Their Predictive Power for Asset Ownership

Abstract

This study compares two risk tolerance scales used in the Survey of Consumer Finances (SCF), namely the long-standing 4-point scale and the newer 11-point scale, to determine which better captures an individual’s investment risk preferences. The analysis includes exploring how each scale relates to household demographics, socioeconomic factors, and ownership of risky versus conservative investments. By utilizing prospect theory, the findings reveal that while both scales effectively measure risk tolerance, the 11-point scale provides a more detailed understanding of differences in asset ownership across risk levels. For financial professionals, these results highlight the value of using a more granular risk assessment tool to better align investment strategies with client preferences, leading to improved client relationships and outcomes.