Cultural and demographic differences in financial risk tolerance

Abstract

The relationship between an individual s financial risk tolerance (FRT) level and demographic factors has been widely researched because of the importance of determining an individual s risk profile. The process by which individuals assess risk to make financial decisions is an important part of the investment process and is an obligatory input for financial advisors in providing financial advice for the client. The assessment of financial risk tolerance is often subjective in nature, and with it comes limitations to quantify it in alignment with objective risk, such as asset allocation and portfolio constructions. Given the importance of financial risk tolerance, both from a legislative as well as a fiduciary perspective, it is imperative that a better understanding of these relationships is obtained to assist financial planners, financial advisers and clients. The aim of the study was to determine the association between an individual s financial risk tolerance and selected demographics. Furthermore, the study aimed to determine whether there were differences in the levels of financial risk tolerance between South African respondents and those from Australia, the United States of America and the United Kingdom. The study was a cross-cultural secondary data analysis of previously collected survey data. The survey data comprised of 6 828 respondents from all four countries who accessed the questionnaire. The secondary data was collected from a survey which used a financial risk tolerance assessment measure, the FinaMetrica personal risk profiling system, which is a commercially provided computer-based risk tolerance measurement tool. Demographics included age, gender, marital status, level of education, income levels and net worth. The risk tolerance components of the questionnaire included questions about the respondent s attitude, values and financial experience. Statistical techniques used for analysis included correlation analysis, t-tests, oneway analysis of variance (ANOVA) and logistic regression. The study revealed cultural differences in the levels of financial risk tolerance between respondents from South Africa, Australia, the United States of America and the United Kingdom, with South Africa having the highest mean financial risk tolerance score. The study revealed that FRT levels are positively related to education, income and combined income for all countries as well as for the total sample when these relationships were considered on a univariate case. These findings were in line with other literature measuring these relationships. For all countries except South Africa, financial risk tolerance scores were found to have a negative relationship with age, which was in line with literature findings. However, within a multivariate model context, age was a consistent predictor and negatively related to financial risk tolerance levels in all countries and for the total sample. In the multivariate model, the total sample consisting of the data of all four countries revealed that higher financial risk tolerance levels were associated with being male, with a higher level of education attained, earning higher income, holding a higher accumulated net worth, being younger and being a South African.