Financial Risk Tolerance

  • John E. GrableEmail author


This chapter provides an overview of the important role financial risk tolerance plays in shaping consumer financial decisions. A review of normative and descriptive models of risk tolerance is provided. Additional discussion regarding the measurement of risk tolerance is also presented. The chapter includes the presentation of a conceptual model of the principal factors affecting financial risk tolerance with recommendations designed to enhance the consumer finance field’s knowledge of risk tolerance. The chapter concludes with a summary of additional research needed to better understand the multidimensional nature of risk tolerance.


Behavioral finance Decision making Demographics Financial risk tolerance Risk aversion Risk taking Risk tolerance 


  1. Allais, M. (1953). Le comportement de l’homme rationel devant le risqué: Critique des potulats et axioms de le’ecole Americaine. Econometrica, 21(4), 503–546.CrossRefGoogle Scholar
  2. Atkinson, J. W. (1957). Motivational determinants of risk taking behavior. Psychological Review, 64(6, Pt.1), 359–372.CrossRefPubMedGoogle Scholar
  3. Barber, B. M., & Odean, T. (2001). Boys will be boys: Gender, overconfidence, and common stock investment. The Quarterly Journal of Economics, 116(1), 261–292.CrossRefGoogle Scholar
  4. Barsky, R. B., Juster, F. T., Kimball, M. S., & Shapiro, M. D. (1997). Preference parameters and behavioral heterogeneity: An experimental approach in the health and retirement study. The Quarterly Journal of Economics, 5, 537–579.CrossRefGoogle Scholar
  5. Bateman, I., & Munro, A. (2005). An experiment on risky choice amongst households. The Economic Journal, 115, C176–C189.CrossRefGoogle Scholar
  6. Bell, D. E. (1982). Regret in decision making under uncertainty. Operations Research, 30(5), 961–981.CrossRefGoogle Scholar
  7. Campbell, J. Y. (2006). Household finance. Journal of Finance, 61(4), 1553–1604.CrossRefGoogle Scholar
  8. Carr, N. (2014). Reassessing the assessment: Exploring the factors that contribute to comprehensive financial risk evaluation. Unpublished Dissertation. Retreived from
  9. Chen, P., & Finke, M. S. (1996). Negative net worth and the life cycle hypothesis. Financial Counseling and Planning, 7(1), 87–96.Google Scholar
  10. Cohn, R. A., Lewellen, W. G., Lease, R. C., & Schlarbaum, G. G. (1975). Individual investor risk aversion and investment portfolio composition. Journal of Finance, 30(2), 605–620.CrossRefGoogle Scholar
  11. Coombs, C. H. (1975). Portfolio theory and the measurement of risk. In M. F. Kaplan & S. Schwartz (Eds.), Human judgment and decision processes. New York: Academic.Google Scholar
  12. Cordell, D. M. (2001). RiskPACK: How to evaluate risk tolerance. Journal of Financial Planning, 14(6), 36–40.Google Scholar
  13. Corter, J. E., & Chen, Y.-J. (2005). Do investment risk tolerance attitudes predict portfolio risk? Journal of Business and Psychology, 20(3), 369–381.CrossRefGoogle Scholar
  14. DellaVigna, S. (2009). Psychology and economics: Evidence from the field. Journal of Economic Literature, 47(2), 315–372.CrossRefGoogle Scholar
  15. Dixon, M. R., Hayes, L. J., Rehfeldt, R. A., & Ebbs, R. E. (1998). A possible adjusting procedure for studying outcomes of risk-taking. Psychological Reports, 82(3), 1047–1050.CrossRefGoogle Scholar
  16. Ellsberg, D. (1961). Risk, ambiguity and the savage axioms. Quarterly Journal of Economics, 75(4), 643–669.CrossRefGoogle Scholar
  17. Fitzpatrick, M. (1983). The definition and assessment of political risk in international business: A review of the literature. Academy of Management Review, 8(2), 249–254.Google Scholar
  18. Friedman, M., & Savage, L. J. (1948). The utility analysis of choices involving risk. Journal of Political Economy, 56(4), 279–304.CrossRefGoogle Scholar
  19. 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), 30–43.Google Scholar
  20. Grable, J. E. (2000). Financial risk tolerance and additional factors which affect risk taking in everyday money matters. Journal of Business and Psychology, 14(4), 625–630.CrossRefGoogle Scholar
  21. Grable, J. E., Britt, S. L., & Webb, F. J. (2008). Environmental and biopsychosocial profiling as a means for describing financial risk-taking behavior. Journal of Financial Counseling and Planning, 19(2), 3–18.Google Scholar
  22. Grable, J. E., & Joo, S.-H. (2004). Environmental and biopsychosocial factors associated with financial risk tolerance. Journal of Financial Counseling and Planning, 15(1), 73–82.Google Scholar
  23. Grable, J. E., & Lytton, R. H. (1998). Investor risk tolerance: testing the efficacy of demographics as differentiating and classifying factors. Financial Counseling and Planning, 9(1), 61–74.Google Scholar
  24. Grable, J. E., & Lytton, R. H. (1999a). Assessing financial risk tolerance: Do demographics, socioeconomic, and attitudinal factors work? Family Economics and Resource Management Biennial, 3(1), 80–88.Google Scholar
  25. Grable, J. E., & Lytton, R. H. (1999b). Financial risk tolerance revisited: The development of a risk assessment instrument. Financial Services Review, 8(3), 163–181.CrossRefGoogle Scholar
  26. Grable, J. E., & Lytton, R. H. (2001). Assessing the concurrent validity of the SCF risk assessment item. Financial Counseling and Planning, 12(2), 43–52.Google Scholar
  27. Grable, J. E., & Rabbani, A. (2014). Risk tolerance across life domains: Evidence from a sample of older adults. Journal of Financial Counseling and Planning, 25(2), 174–183.Google Scholar
  28. Grable, J. E., & Schumm, W. (2010). An estimation of the reliability of the survey of consumer finances risk-tolerance question. Journal of Personal Finance, 9(1), 117–131.Google Scholar
  29. Guillemette, M. A., Finke, M., & Gilliam, J. (2012). Risk tolerance questions to best determine client portfolio allocation preferences. Journal of Financial Planning, 25(5), 36–44.Google Scholar
  30. Guillemette, M., & Finke, M. (2014). Do large swings in equity values change risk tolerance. Journal of Financial Planning, 27(6), 44–50.Google Scholar
  31. Hanna, S. D., Gutter, M. S., & Fan, J. X. (2001). A measure of risk tolerance based on economic theory. Financial Counseling and Planning, 12(2), 53–60.Google Scholar
  32. Hanna, S. D., & Lindamood, S. (2004). An improved measure of risk aversion. Financial Counseling and Planning, 15(2), 27–38.Google Scholar
  33. Hanna, S., & Chen, P. (1997). Subjective and objective risk tolerance: Implications for optimal portfolios. Financial Counseling and Planning, 8(2), 17–26.Google Scholar
  34. Hoffmann, A. O. I., Post, T., & Pennings, J. M. E. (2013). Individual investor perceptions and behavior during the financial crisis. Journal of Banking & Finance, 37(1), 60–74.CrossRefGoogle Scholar
  35. Irwin, C. E. (1993). Adolescence and risk taking: How are they related? In N. J. Bell & R. W. Bell (Eds.), Adolescent risk taking. Newbury Park, CA: Sage.Google Scholar
  36. Irwin, C. E., & Millstein, S. G. (1986). Biopsychosocial correlates of risk-taking behaviors during adolescence: Can the physician intervene? Journal of Adolescent Health Care, 7(Suppl), 82S–96S.PubMedGoogle Scholar
  37. Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263–291.CrossRefGoogle Scholar
  38. Kogan, N., & Wallach, M. A. (1964). Risk taking: A study in cognition and personality. New York: Holt, Rinehart & Winston.Google Scholar
  39. Kunreuther, H. (1979). The changing societal consequences of risks from natural hazards. The Annals of the American Academy of Political and Social Sciences, 443(1), 104–116.CrossRefGoogle Scholar
  40. Loewenstein, G. F., Weber, E. U., Hsee, C. K., & Welch, N. (2001). Risk as feelings. Psychological Bulletin, 127(2), 267–286.CrossRefPubMedGoogle Scholar
  41. Loomes, G., & Sugden, R. (1982). Regret theory: An alternative theory of rational choice under uncertainty. The Economic Journal, 92, 805–824.CrossRefGoogle Scholar
  42. Lytton, R. H., Grable, J. E., & Klock, D. D. (2013). The process of financial planning: Developing a financial plan (2nd ed.). Erlanger, KY: National Underwriter.Google Scholar
  43. MacCrimmon, K. R., & Wehrung, D. A. (1984). The risk-in-basket. Journal of Business, 57(3), 367–387.CrossRefGoogle Scholar
  44. MacCrimmon, K. R., & Wehrung, D. A. (1986). Taking risks. New York: The Free Press.Google Scholar
  45. Markowitz, H. (1952). Portfolio selection. Journal of Finance, 7(1), 77–91.Google Scholar
  46. Mayo, H. B. (2003). Investments: An Introduction (7th ed.). Mason, OH: Thomson South-Western.Google Scholar
  47. Newman, O. (1972). Gambling: Hazard and reward. Atlantic Highlands, NJ: Athlone Press/Humanities Press.Google Scholar
  48. Odean, T. (1998). Are investors reluctant to realize their losses? Journal of Finance, 53(5), 1775–1798.CrossRefGoogle Scholar
  49. Okun, M. A. (1976). Adult age and cautiousness in decision. Human Development, 19(4), 220–233.CrossRefPubMedGoogle Scholar
  50. Olson, K. R. (2006). A literature review of social mood. The Journal of Behavioral Finance, 7(4), 193–203.CrossRefGoogle Scholar
  51. Payne, J. W., Laughhunn, D. J., & Crum, R. (1984). Multiattribute risky choice behavior: The editing of complex prospects. Management Science, 30(11), 1350–1361.CrossRefGoogle Scholar
  52. Plous, S. (1993). The psychology of judgment and decision making. New York: McGraw-Hill.Google Scholar
  53. Riley, W. B., & Chow, K. V. (1992). Asset allocation and individual risk aversion. Financial Analysts Journal, 48(6), 32–37.CrossRefGoogle Scholar
  54. Roszkowski, M. J. (1999). Risk tolerance in financial decisions. In D. M. Cordell (Ed.), Fundamentals of financial planning (pp. 179–248). Bryn Mawr, PA: The American College.Google Scholar
  55. Roszkowski, M. J., Davey, G., & Grable, J. E. (2005). Questioning the questionnaire method: Insights on measuring risk tolerance from psychology and psychometrics. Journal of Financial Planning, 18(4), 68–76.Google Scholar
  56. Roszkowski, M. J., & Grable, J. (2005). Estimating risk tolerance: The degree of accuracy and the paramorphic representations of the estimate. Financial Counseling and Planning, 16(2), 29–47.Google Scholar
  57. Schoemaker, P. J. H. (1980). Experiments on decisions under risk: The expected utility hypothesis. Boston: Martinus Nijhoff.CrossRefGoogle Scholar
  58. Shefrin, H., & Statman, M. (1985). The disposition to sell winners too early and ride loser too long: Theory and evidence. The Journal of Finance, 40(4), 777–792.CrossRefGoogle Scholar
  59. Shefrin, H., & Statman, M. (1993). Behavioral aspects of the design and marketing of financial products. Financial Management, 22(2), 123–134.CrossRefGoogle Scholar
  60. Siegel, F. W., & Hoban, J. P. (1982). Relative risk aversion revisited. The Review of Economics and Statistics, 64(3), 481–487.CrossRefGoogle Scholar
  61. Slovic, P. (2004). The perception of risk. London: Earthscan.Google Scholar
  62. Slovic, P., Fischhoff, B., & Lichtenstein, S. (1978). Accident probabilities and seat belt usage: A psychological perspective. Accident Analysis and Prevention, 10(4), 281–285.CrossRefGoogle Scholar
  63. Snelbecker, G. E., Roszkowski, M. J., & Cutler, N. E. (1990). Investors’ risk tolerance and return aspirations, and financial advisors’ interpretations: A conceptual model and exploratory data. The Journal of Behavioral Economics, 19(4), 377–393.CrossRefGoogle Scholar
  64. Statman, M. (1995). A behavioral framework for dollar-cost averaging. The Journal of Portfolio Management, 22(1), 70–78.CrossRefGoogle Scholar
  65. Tversky, A. (1969). Intransitivity of preferences. Psychological Review, 76(1), 31–48.CrossRefGoogle Scholar
  66. Tversky, A., & Kahneman, D. (1981). The framing of decisions and the psychology of choice. Science, 211(4481), 453–458.CrossRefPubMedGoogle Scholar
  67. Van de Venter, G., Michayluk, D., & Davey, G. (2012). A longitudinal study of financial risk tolerance. Journal of Economic Psychology, 33(4), 794–800.CrossRefGoogle Scholar
  68. Von Neumann, J., & Morgenstern, O. (1947). Theory of games and economic behavior. Princeton, NJ: Princeton University Press.Google Scholar
  69. Wallach, M. A., & Kogan, N. (1959). Sex differences and judgment processes. Journal of Personality, 27(4), 555–564.CrossRefPubMedGoogle Scholar
  70. Wallach, M. A., & Kogan, N. (1961). Aspects of judgment and decision making: Interrelationships and changes with age. Behavioral Science, 6(1), 23–26.CrossRefPubMedGoogle Scholar
  71. Weber, E. U., Blais, A.-R., & Betz, N. E. (2002). A domain-specific risk-attitude scale: Measuring risk perceptions and risk behaviors. Journal of Behavioral Decision Making, 15(4), 263–290.CrossRefGoogle Scholar
  72. Weber, E. U., & Milliman, R. A. (1997). Perceived risk attitudes: Relating risk perceptions to risky choice. Management Science, 43(2), 123–144.CrossRefGoogle Scholar
  73. Webley, P. (1995). Accounts of accounts: En route to an economic psychology of personal finance. Journal of Economic Psychology, 16(3), 469–475.CrossRefGoogle Scholar
  74. Yao, R., & Curl, A. L. (2011). Do market returns influence risk tolerance? Evidence from panel data. Journal of Family Economic Issues, 32(3), 532–544.CrossRefGoogle Scholar

Copyright information

© Springer International Publishing Switzerland 2016

Authors and Affiliations

  1. 1.Department of Financial Planning, Housing and Consumer EconomicsUniversity of GeorgiaAthensUSA

Personalised recommendations