Personality and Financial Risk Tolerance
Date
2014
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Haverford College. Department of Economics
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Thesis
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Award
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eng
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Haverford users only
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Abstract
Risk tolerance is a term used differently in psychology and economics. In psychology, personality is known to affect type of risk taking; instrumental and stimulating. In economics, financial risk tolerance is known to be affected by gender, income, and age. Personality may also affect financial risk tolerance. This paper explores the relationship between personality and financial risk tolerance using the Big Five Inventory and BIS-11 test to measure personality and a multiple price list to measure financial risk tolerance. Additionally, this paper examines the relationship between the economic and psychological definitions of risk tolerance using the Stimulating and Instrumental Risk Questionnaire to measure the psychological interpretation. Results indicate personality does in fact affect financial risk tolerance and type of risk taking; a 3.115 standard deviation increase in agreeableness is associated with about a 0.934 standard deviation decrease in financial risk tolerance, a 0.150 standard deviation increase in impulsiveness is associated with approximately a 0.040 standard deviation decrease in instrumental risk taking, and a 2.973 standard deviation increase in conscientiousness is associated with roughly a 1.216 standard deviation decrease in stimulating risk taking. Furthermore, the economic definition of risk tolerance is most closely related to the psychological definition of risk tolerance through stimulating risk taking; a 0.281 standard deviation increase in stimulating risk taking is associated with roughly a 0.102 standard deviation decrease in financial risk tolerance.