The Effect of Demographic Characteristics on an Individual’s Financial Risk Tolerance

20 Pages Posted: 1 Oct 2018 Last revised: 21 Mar 2019

See all articles by Christina Wang

Christina Wang

University of Missouri at Columbia - Department of Personal Financial Planning, Students

Date Written: January 31, 2019

Abstract

This study was designed to build a comprehensive model of financial risk tolerance (FRT) using a number of demographic variables from a large, nationally representative dataset, the Survey of Consumer Finances (SCF) 2016. Linear regression was used to confirm relationships between income, education, financial knowledge, age, marital status, employment status, and race/ethnicity with subjective FRT. All seven variables were found to be significant determinants of FRT, with income, education, and financial knowledge showing positive relationships and age showing a negative relationship. Effects of marital status, employment status, and race/ethnicity varied with the specific measure of subjective FRT used, but generally single males were found to be more risk tolerant than married couples and single females, the self-employed demonstrate higher risk tolerances than those who are employed by someone else or not employed, and there are significant but inconsistent differences in risk tolerance between whites, blacks/African Americans, and Hispanics/Latinos. This study evaluates both the traditional measure of FRT collected by the SCF and the new measure introduced in the 2016 survey year, and I conclude that even within a single survey, subjective measures of FRT are inconsistent.

Keywords: financial risk tolerance, Survey of Consumer Finances, income, education, financial knowledge, marital status, employment status, race/ethnicity, age

JEL Classification: A14, G00, J10

Suggested Citation

Wang, Christina, The Effect of Demographic Characteristics on an Individual’s Financial Risk Tolerance (January 31, 2019). 2019 Academic Research Colloquium for Financial Planning and Related Disciplines. Available at SSRN: https://ssrn.com/abstract=3257904 or http://dx.doi.org/10.2139/ssrn.3257904

Christina Wang (Contact Author)

University of Missouri at Columbia - Department of Personal Financial Planning, Students ( email )

Columbia, MO 65211
United States

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