Journal of Family and Economic Issues

, Volume 32, Issue 3, pp 532–544 | Cite as

Do Market Returns Influence Risk Tolerance? Evidence from Panel Data

  • Rui YaoEmail author
  • Angela L. Curl
Original Paper


This study used the 1992–2006 waves of the Health and Retirement Study (HRS) to investigate changes in risk tolerance levels over time in response to stock market returns. Findings indicate that risk tolerance tends to increase when market returns increase and decrease when market returns decrease. Individuals who change their risk tolerance in this manner are likely to invest in stocks when prices are high and sell when prices are low. Researchers, employers, financial educators and practitioners should help investors overcome the bias of overweighting recent news of market performance.


Cognitive bias Health and Retirement Study Longitudinal study Multilevel analysis Risk tolerance 


  1. Ajzen, I. (2005). Attitudes, personality, and behavior (2nd ed.). Milton-Keynes, England: Open University Press, McGraw-Hill.Google Scholar
  2. Arrow, K. J. (1965). The theory of risk aversion. Helsinki, Sweden: Yrjo Jahnsson Foundation. (Reprinted from Essays in the Theory of Risk-bearing, pp. 90–120, by K. J. Arrow, Ed., 1971, Chicago, IL: Markham).Google Scholar
  3. Atkinson, R. C., Bower, G. H., & Crothers, E. J. (1965). An introduction to mathematical learning theory. New York: Wiley.Google Scholar
  4. Bailey, M. J., Olson, M., & Wonnacott, P. (1980). The marginal utility of income does not increase: Borrowing, lending, and Friedman-Savage gambles. American Economic Review, 70(3), 372–379.Google Scholar
  5. Barsky, R. B., Juster, T., Kimball, M. S., & Shapiro, M. D. (1997). Preference parameters and behavioral heterogeneity: An example approach in the health and retirement study. Quarterly Journal of Economics, 112(2), 537–579.CrossRefGoogle Scholar
  6. Brennan, M. J., & Kraus, A. (1976). The geometry of separation and myopia. Journal of Financial and Quantitative Analysis, 11(2), 171–193.CrossRefGoogle Scholar
  7. Broadbent, D. E., & Broadbent, M. H. P. (1981). Recency effects in visual memory. Quarterly Journal of Experimental Psychology: Human Experimental Psychology, 33A, 1–15.Google Scholar
  8. Brodie, D. A., & Murdock, B. B. (1977). Effect of presentation time on nominal and functional serial-position curves of free recall. Journal of Verbal Learning and Verbal Behavior, 16, 185–200.CrossRefGoogle Scholar
  9. Campbell, J. Y. (2006). Household finance. Journal of Finance, 61, 1553–1604.CrossRefGoogle Scholar
  10. Chaulk, B., Johnson, P. J., & Bulcroft, R. (2003). Effects of marriage and children on financial risk tolerance: A synthesis of family development and prospect theory. Journal of Family and Economic Issues, 24(3), 257–279.CrossRefGoogle Scholar
  11. Clarke, R. G., & Statman, M. (1998). Bullish or bearish? Financial Analysts Journal, 54, 63–72.CrossRefGoogle Scholar
  12. Clark-Murphy, M., Gerrans, P., & Speelman, C. (2009). Return chasing as a driver in individual retirement savings investment choices: Evidence from Australia. Journal of Family and Economic Issue, 30(1), 4–19.CrossRefGoogle Scholar
  13. Coleman, S. (2003). Risk tolerance and the investment behavior of Black and Hispanic heads of household. Financial Counseling and Planning, 14(2), 43–52.Google Scholar
  14. Fair, R. C. (1994). How fast do old men slow down? The Review of Economics and Statistics, 76, 103–118.CrossRefGoogle Scholar
  15. Finke, M. S., & Huston, S. J. (2003). The brighter side of financial risk: Financial risk tolerance and wealth. Journal of Family and Economic Issues, 24(3), 233–255.CrossRefGoogle Scholar
  16. Fisher, P. J., & Montalto, C. P. (2010). Loss aversion and saving behavior: Evidence from the 2007 U.S. Survey of Consumer Finances. Journal of Family and Economic Issue, Online First. doi: 10.1007/s10834-010-9196-1.
  17. Gilliam, J. E., Goetz, J. W., & Hampton, V. L. (2008). Spousal differences in financial risk tolerance. Financial Counseling and Planning, 19(1), 3–11.Google Scholar
  18. Grable, J. E. (2000). Financial risk tolerance and additional factors that affect risk taking in everyday money matters. Journal of Business and Psychology, 14(4), 625–630.CrossRefGoogle Scholar
  19. Grable, J. E., & Joo, S. H. (2004). Environmental and biopsychosocial factors associated with financial risk tolerance. Financial Counseling and Planning, 15(1), 73–82.Google Scholar
  20. Grable, J. E., & Lytton, R. H. (2003). The development of a risk assessment instrument: A follow-up study. Financial Services Review, 12, 257–274.Google Scholar
  21. Grable, J. E., Lytton, R. H., & O’Neill, B. (2004). Projection bias and financial risk tolerance. The Journal of Behavioral Finance, 5(3), 142–147.CrossRefGoogle Scholar
  22. Grable, J. E., Lytton, R. H., O’Neill, B., Joo, S.-H., & Klock, D. (2006). Risk tolerance, projection bias, vividness and equity prices. Journal of Investing, 15(2), 68–74.CrossRefGoogle Scholar
  23. Gutter, M., Fox, J., & Montalto, C. P. (1999). Racial differences in investor decision making. Financial Services Review, 8(3), 149–162.CrossRefGoogle Scholar
  24. Halek, M., & Eisenhauer, J. G. (2001). Demography of risk aversion. Journal of Risk and Insurance, 68, 1–24.CrossRefGoogle Scholar
  25. Hallahan, T. A., Faff, R. W., & McKenzie, M. D. (2004). An empirical investigation of personal financial risk tolerance. Financial Services Review, 13, 57–78.Google Scholar
  26. Hanna, S. D., & Lindamood, S. (2004). An improved measure of risk tolerance. Journal of Financial Counseling and Planning, 15(2), 27–38.Google Scholar
  27. Hartog, J., Ferrer-I-Carbonell, A., & Jonker, N. (2002). Linking measured risk aversion to individual characteristics. Kyklos, 55(1), 3–26.CrossRefGoogle Scholar
  28. Hedeker, D. (2007). Multilevel models for ordinal and nominal variables. In J. de Leeuw & E. Meijer (Eds.), Handbook of multilevel analysis (pp. 239–276). New York: Springer.Google Scholar
  29. Heeringa, S. G., & Connor, J. H. (1995, May). Technical description of the Health and Retirement Survey sample design. Retrieved March 25, 2009, from
  30. Horvath, P., & Zuckerman, M. (1993). Sensation seeking, risk appraisal, and risky behavior. Personality and Individual Differences, 14, 41–52.CrossRefGoogle Scholar
  31. Ibbotson Associates. (2005). Stocks, bonds, bill, and inflation 2005 yearbook. Chicago: Ibbotson Associates.Google Scholar
  32. Jianakoplos, N. A., & Bernasek, A. (2008). Family financial risk taking when the wife earns more. Journal of Family and Economic Issues, 29, 289–306.CrossRefGoogle Scholar
  33. Juster, F. T., & Suzman, R. (1995). An overview of the Health and Retirement Study. Journal of Human Resources, 30(Suppl.), S7–S56.Google Scholar
  34. Keister, L. A. (2000). Race and wealth inequality: The impact of racial differences in asset ownership on the distribution of household wealth. Social Science Research, 29, 477–502.CrossRefGoogle Scholar
  35. Kimball, M. S., Sahm, C. R., & Shapiro, M. D. (2008). Imputing risk tolerance from survey responses. Journal of the American Statistical Association, 103(483), 1028–1038.CrossRefGoogle Scholar
  36. Leena, K., Tomi, L., & Arja, R. (2005). Intensity of mobile phone use and health compromising behaviours—How is information and communication technology connected to health-related lifestyle in adolescence? Journal of Adolescence, 28, 35–47.CrossRefGoogle Scholar
  37. Loewenstein, G., O’Donoghue, T., & Rabin, M. (2003). Projection bias in predicting future utility. Quarterly Journal of Economics, 118(4), 1209–1248.CrossRefGoogle Scholar
  38. Malkiel, B. (2007). A random walk down Wall Street: The time-tested strategy for successful investing. New York: W.W. Norton & Co.Google Scholar
  39. Miller, N., & Campbell, D. T. (1959). Recency and primacy in persuasion as a function of the timing of speeches and measurement. Journal of Abnormal and Social Psychology, 59, 1–9.CrossRefGoogle Scholar
  40. Mittra, S., Sahu, A. P., & Crane, R. A. (2007). Practicing financial planning for professionals (10th ed.). Rochester Hills, MI: Rochester Hills Publishing.Google Scholar
  41. Murdock, B. B. (1962). The serial position effect of free recall. Journal of Experimental Psychology, 64, 482–488.CrossRefGoogle Scholar
  42. Palsson, A. M. (1996). Does the degree of relative risk aversion vary with household characteristics? Journal of Economic Psychology, 17(6), 771–787.CrossRefGoogle Scholar
  43. Pratt, J. W. (1964). Risk aversion in the small and in the large. Econometrica, 32(1/2), 122–136.CrossRefGoogle Scholar
  44. Raudenbush, S. W., & Bryk, A. S. (2002). Hierarchical linear models: Applications and data methods (2nd ed.). Sage: Thousand Oaks.Google Scholar
  45. Raudenbush, S. W., Bryk, A. S., & Congdon, R. (2006). Hierarchical linear models 6.06 [software]. Chicago, IL: Scientific Software International.Google Scholar
  46. Rogosa, D. R., Brandt, D., & Zimowski, M. (1982). A growth curve approach to the measurement of change. Psychological Bulletin, 90, 726–748.CrossRefGoogle Scholar
  47. Schubert, R., Brown, M., Gysler, M., & Brachinger, H. W. (1999). Financial decision-making: Are women really more risk-averse? American Economic Review, 89(2), 381–385.CrossRefGoogle Scholar
  48. Seljamo, S., Aromaa, M., Koivusilta, L., Rautava, P., Sourander, A., Helenius, H., et al. (2006). Alcohol use in families: A 15-year prospective follow-up study. Addiction, 101, 984–992.CrossRefGoogle Scholar
  49. Shefrin, H. (2000). Beyond greed and fear: Understanding behavioral finance and the psychology of investing. Cambridge, MA: Harvard Business School Press.Google Scholar
  50. St Clair, P., Blake, D., Bugliari, D., Chien, S., Hayden, O., Hurd, M., et al. (2008). RAND HRS data documentation, version h. Santa Monica, CA: Labor & Population Program, RAND Center for the Study of Aging, RAND Corporation.Google Scholar
  51. Sung, J., & Hanna, S. (1996). Factors related to risk tolerance. Financial Counseling and Planning, 7, 11–20.Google Scholar
  52. Tan, L., & Ward, G. (2000). A recency-based account of the primacy effect in free recall. Journal of Experimental Psychology. Learning, Memory, and Cognition, 26, 1589–1626.CrossRefGoogle Scholar
  53. Willis, R. J. (2007, December). The Health and Retirement Study: A longitudinal study of health, retirement, and aging, 1992–2006 [Computer file]. Conducted by the University of Michigan, Survey Research Center. ICPSR ed. RAND Corporation, HRS Version H, prepared for the Social Security Administration. Ann Arbor, MI: Inter-university Consortium for Political and Social Research [producer and distributor].Google Scholar
  54. Xiao, J. J., Alhabeeb, M. J., Hong, G. S., & Haynes, G. W. (2001). Attitude toward risk and risk-taking behavior of business-owning families. Journal of Consumer Affairs, 35(2), 307–325.CrossRefGoogle Scholar
  55. Yao, R., Gutter, M. S., & Hanna, S. D. (2005). The financial risk tolerance of Blacks, Hispanics and Whites. Financial Counseling and Planning, 16(1), 51–62.Google Scholar
  56. Yao, R., & Hanna, S. D. (2005). The effect of gender and marital status on financial risk tolerance. Journal of Personal Finance, 4(1), 66–85.Google Scholar
  57. Yao, R., Hanna, S. D., & Lindamood, S. (2004). Changes in financial risk tolerance, 1983–2001. Financial Services Review, 13(4), 249–266.Google Scholar
  58. Yao, R., Hanna, S. D., & Montalto, C. P. (2002). Factors related to meeting the capital accumulation ratio guideline. Financial Services Review, 11(2), 153–171.Google Scholar

Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  1. 1.Department of Personal Financial PlanningUniversity of MissouriColumbiaUSA
  2. 2.School of Social WorkUniversity of MissouriColumbiaUSA

Personalised recommendations