A Comparison of Financial Risk-Tolerance Assessment Methods in Predicting Subsequent Risk Tolerance and Future Portfolio Choices

Eun Jin Kwak () and John E. Grable
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Eun Jin Kwak: Department of Accounting and Finance, Cofrin School of Business, University of Wisconsin-Green Bay, Green Bay, WI 54311, USA
John E. Grable: Department of Financial Planning, Housing, and Consumer Economics, College of Family and Consumer Science, University of Georgia, Athens, GA 30602, USA

Risks, 2024, vol. 12, issue 11, 1-18

Abstract: This study explores the effectiveness of various methods for measuring risk tolerance, with the aim to better understand the risk-taking attitudes and behaviors of financial decision-makers. Using data collected between October 2020 and March 2021, the research investigates three key areas: (a) the stability of risk tolerance over a six-month period, (b) the individual and household characteristics that predict future risk tolerance, and (c) the predictive accuracy of various risk-tolerance assessment methods in relation to portfolio choices made by financial decision-makers. The results show that risk-tolerance scores derived from a psychometrically developed scale provide the most accurate insights into future risk-taking attitudes and portfolio decisions. For those looking for a simple way to assess both current and future risk tolerance and portfolio choices, a stated-preference item can be effective. Although less consistent, a revealed-preference test can also be used to predict risk tolerance and risk-taking behavior. Findings provide guidance for financial decision-makers and financial advisors by comparing the key features of the three primary risk-tolerance assessment methods evaluated in this study. The study also establishes a foundational basis for selecting the most appropriate evaluation approach, based on the variables identified in the findings.

Keywords: financial risk tolerance; propensity measures; stated preferences; revealed preferences (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:gam:jrisks:v:12:y:2024:i:11:p:170-:d:1505665

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