Mind the Gap: Inconsistencies Between Subjective and Objective Financial Risk Tolerance

RIsk SCreening on the Financial Market (RISC-FM): A tool to assess investors’ financial risk tolerance

“…Objective as well as subjective measures of risk tolerance are needed to accurately assess financial risk tolerance (Marinelli et al, 2017). The presented scale can be combined with clients' objective data such as investors' real-life portfolios to further prove its criterion validity.…”

“…Measuring risk tolerance is challenging as it is a psychological characteristic and as such not directly observable (Yao & Curl, 2011). Combining subjective data obtained from developed scales and objective risk measures based on previous behavior shall result in the most accurate assessment of clients' risk tolerance (Marinelli, Mazzoli, & Palmucci, 2017). However, gathering objective data is not always possible due to lack of data and privacy protection.…”

A deeper dive: A mixed methods approach to risk tolerance

“…Research shows that risk tolerance remains fairly stable throughout one's life (Sahm, 2007;Van de Venter et al, 2012). Moreover, various constructs, including education, experience, literacy, and emotion, affect how an individual responds to particular risk tolerance measures (Finke & Guillemette, 2016;Grable et al, 2009;Loewenstein et al, 2001;Marinelli et al, 2017;Roszkowski & Grable, 2005). This literature review summarizes the prevailing concerns about risk tolerance measures and motivates this investigation's theory choice and mixed-method approach.…”

“…Risk is typically studied using quantitative means, although research has documented that qualitative factors play an important role (Marinelli et al, 2017). To address this gap in the current research, this study used FTT and mixed methods (i.e., quantitative and qualitative methods) to explore how individuals consider risk tolerance as it relates to their financial situation.…”

“…Risk tolerance is challenging to measure because it is assessed in two different ways-stated preference and revealed preference (Finke & Guillemette, 2016;Marinelli et al, 2017;Mata et al, 2018). Recent work found that these terms are used interchangeably as a proxy for risk tolerance in personal finance, but that they do not in fact assess the same concepts (Mata et al, 2018).…”