Risk-taking behaviour in financial decision making: A village-level study

Abstract

The present study attempts to estimate the impact of various demographic determinants of financial risk tolerance of rural people. The study was conducted in some selected villages of rural West Bengal. We employed an experiment-based method where we elicit the risk attitudes of rural people from a risk game. In this game, the participants were given a certain amount of money and were asked to bet from this money depending on the condition that he might receive more or lose money depending on the results from rolling six sided dice. Our analysis on the relationship between participants' demographic characteristics and financial risk tolerance reveals that age, number of dependents, number of earning member, and household debt affects negatively, while education, income, and number of shocks have positive effect on financial risk tolerance. In line with general belief, participants belong to higher age brackets have lower financial risk tolerance than younger age group participants. The study also established the widely held belief that women have lower risk tolerance than men, which is also true for rural population. Individual with higher education have a higher probability of financial risk tolerance. Individual income also has a significant impact on financial risk tolerance. The result of this study has an important implication for fund management industry targeting rural market in India. Investigating investor's risktaking tolerance is a dominant factor in designing appropriate investment portfolio and prevent unnecessary losses from inappropriate portfolio allocation decision. There is a need to expand the scope of this study with heterogeneous market compositions and psychological determinants of individuals.