Measuring Financial Risk Tolerance

Gilliam, J. Chatterjee, S. & Grable, J. (2010). Measuring the perception of financial risk tolerance: A tale of two measures. Journal of Financial Counseling and Planning, 21 (2), pp. 30-43.

Brief Description:  Estimating a person’s risk tolerance is important for guiding him or her into a satisfactory investment portfolio. The Survey of Consumer Finance (SCF) simple measure for assessing risk tolerance was compared to a 13-item scale (GL-RTS) in assessing risky and non-risky asset holdings by university faculty and staff. The 13-item scale (included in the article) had better explanatory power for allocation into both stocks and risk-free assets. The SCF question appears to better estimate risk tolerance for investments than for a more general tolerance for risk.

Implications:  Both the SCF and the GL-RTS measures appear to evaluate investment-related risk tolerance.   However, caution should be used when interpreting the findings of studies using the SCF risk tolerance question for non-investment risk attitudes or behaviors. More work needs to be done on the 13-item scale since it has been used only on small non-representative samples.