Determinants of Financial Risk Tolerance: An Analysis of Psychological Factors

Abstract

Financial risk tolerance is a complex process that goes beyond the exclusive use of demographic characteristics. Despite the necessity of developing a comprehensive financial risk tolerance measurement model, the psychological factors that might be important have been long overlooked. The purpose of this paper is to investigate the influence of psychological factors on financial risk tolerance level. The sample (n = 1204) comprises university students from different parts of Malaysia. Significant financial risk tolerance differences are found as a function of gender and race. Students with high financial risk tolerance (FRT) are found to be positively correlated with the propensity for regret, the propensity for trust, the propensity to attribute success to luck, the propensity for overconfidence, and the propensity for social interaction, but not with happiness in life. These findings highlight the importance of individual propensities in assessing the financial risk tolerance level of a person. This study will act as an aid to financial advisors in understanding the behavior and attitudes of their clients.