Developing an Attitude to Risk Questionnaire for Retail Investors

Abstract

This paper summarises the process undertaken to develop a much-needed rigorous and theoretically based attitude to risk (ATR) questionnaire for retail investors and documents the results following its application in a large survey. The questionnaire is built upon the strong foundations of seminal work on prospect theory and integrates best practice from psychology and psychometric scale development. It provides a measure of ATR that is academically rigorous, transparent and practically relevant at a time when existing measures of ATR are either academically dated or are provided by consultancies who do not openly share the theoretical or psychometric underpinnings of their approaches. Our new questionnaire offers a robust alternative and comprises 15 items to assess financial risk tolerance. As such, it provides information about two aspects important for attitude measurement: the content of risk tolerance (where items are classified in terms of seeking gains (drivers of risk behaviour), avoiding losses (constrainers of risk behaviour) and contextual factors that act as reference points (contextual enablers of risk behaviour) and the structure (where each item reflects primarily a cognitive, behavioural or emotional aspect) of attitude to risk. We show that the new questionnaire has a solid three-factor interpretation in terms of the content aspects outlined above as well being statistically reliable in terms of Cronbach’s alpha and having validity in the eyes of the financial advisor community.

Keywords: retail investor, attitude to risk, financial advisor, risk tolerance, risk aversion

JEL Classification: G11, G41, G51