Individual Financial Risk Tolerance and the Global Financial Crisis

Abstract

We investigate the temporal variation of individual investors’ tolerance towards financial risk by focusing on changes in tolerance associated with the global financial crisis of 2007-2009. Financial risk tolerance is measured from a psychometric scale administered to individual investors and analysed cross-sectionally and longitudinally after controlling for demographic, socio-economic and regional variations. In absolute terms the change in financial risk tolerance is small and contrasts with a popular view that risk tolerance is an elastic psychological state overly influenced by the pervading market conditions. The results suggest that even in the presence of significantly negative financial events, financial risk tolerance tends to be a reasonably stable attribute that is not subject to great fluctuation in the shorter term but possibly influenced and reshaped by events more gradually over time.

Keywords: financial risk tolerance, global financial crisis, investment choice, risk aversion, FinaMetrica

JEL Classification: D14, G11