Psychological Antecedents of Financial Risk Tolerance

Abstract

Research indicates that financial risk tolerance (FRT) is a subjective and complex phenomenon and may diverge from individual to individual based on their demographics, genetic makeup, socioeconomic profiles, personality types, and psychological constructs. Past researchers have mainly focused on relating the socioeconomic profile, demographics, and personality type of investors to FRT. This article uses a novel approach that relates other critical behavioral and psychological factors, such as financial anxiety, financial satisfaction, obsession with money, personality type, self-esteem, and sensation-seeking behavior, as equally important contributors for determining the FRT. Confirmatory factor analysis and structural equation modeling techniques were used to test the variables and hypotheses. The results show that financial satisfaction is negatively correlated with FRT, whereas financial anxiety, obsession with money, personality type, self-esteem, and sensation-seeking behavior are positively correlated with FRT. All these variables act as antecedents of FRT.

TOPICS: Wealth management, behavioral financial in wealth management

Key Findings

• • Personality Type A, self-esteem, and sensation-seeking behavior are positively correlated with financial risk tolerance.

• • Financial satisfaction negatively influences financial risk tolerance.

• • Obsession with money negatively influences financial satisfaction whereas financial satisfaction negatively influences financial anxiety.