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Relationship between Biopsychosocial Factors and Financial Risk Tolerance: An Empirical Study

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  • M Kannadhasan
  • S Aramvalarthan
  • S K Mitra
  • Vinay Goyal

Abstract

Executive Summary Financial risk tolerance (FRT) refers to the retail investors’ willingness to accept the negative changes in the value of investment or an outcome that is adversely different from the expected one. Understanding and assessing FRT plays a crucial role in individual choices about wealth accumulation, portfolio allocation, and all other investment and finance-related decisions, and in achieving financial goals. An advisor has to accurately assess FRT for achieving his/her goal or investor’s goal. Failure to do so leads to the choice of an investment option/portfolio which is inconsistent with one’s FRT, resulting in investor disappointment, that is, unbearable loss to the client. Such a situation may adversely affect the client–advisor relationship. Measuring FRT is challenging as it is a multidimensional attitude. Besides, it is an elusive concept that appears to be influenced by a number of predisposing factors such as demographic, environmental, and psychosocial factors. This study aims to identify the factors that are related to risk tolerance from outside the financial services domain such as psychology, economics, and bio-sociology. It deals most specifically with the relationship between biopsychosocial factors and FRT. Those who are interested in assessing and predicting FRT can move closer to a theoretical account that blends psychological and economic insights and supplements the understanding of risk-taking attitudes and behaviour of retail investors. Such an understanding will help financial advisors, policy makers, and researchers in identifying the determinants of an individual’s FRT to suggest the suitable investment alternatives to their clients. A single cross-sectional survey was conducted among 951 retail investors with various levels of investment experience through a structured questionnaire covering a variety of demographic factors. An analysis of the data collected through the questionnaire indicates that all the three factors—self-esteem, personality type, and sensation seeking—are positively related to FRT. This study adds to the extant literature on psychological determinants of FRT.

Suggested Citation

  • M Kannadhasan & S Aramvalarthan & S K Mitra & Vinay Goyal, 2016. "Relationship between Biopsychosocial Factors and Financial Risk Tolerance: An Empirical Study," Vikalpa: The Journal for Decision Makers, , vol. 41(2), pages 117-131, June.
    • Handle: RePEc:sae:vikjou:v:41:y:2016:i:2:p:117-131
    DOI: 10.1177/0256090916642685
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    References listed on IDEAS

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    Cited by:

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    2. Kamini Rai & Abha Gupta & Anshu Tyagi, 2021. "Personality Traits Leads to Investor’s Financial Risk Tolerance: A Structural Equation Modelling Approach," Management and Labour Studies, XLRI Jamshedpur, School of Business Management & Human Resources, vol. 46(4), pages 422-437, November.
    3. Daniel M. V. Bernaola & Gizelle D. Willows & Darron West, 2021. "The relevance of anger, anxiety, gender and race in investment decisions," Mind & Society: Cognitive Studies in Economics and Social Sciences, Springer;Fondazione Rosselli, vol. 20(1), pages 1-21, June.
    4. Umair Baig & Batool Muhammad Hussain & Vida Davidaviciene & Ieva Meidute-Kavaliauskiene, 2021. "Exploring Investment Behavior of Women Entrepreneur: Some Future Directions," IJFS, MDPI, vol. 9(2), pages 1-15, April.
    5. Anbar, Adem & Eker, Melek, 2019. "The Effect of Sociodemographic Variables and Love of Money on Financial Risk Tolerance of Bankers," Business and Economics Research Journal, Uludag University, Faculty of Economics and Administrative Sciences, vol. 10(4), pages 855-866, July.
    6. Shakira MUKHTAR & Anisa JAN, 2023. "Decoding financial literacy's mediating role: analyzing the influence of biopsychosocial indicators on financial satisfaction and risk tolerance among millennial investors," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(4(637), W), pages 219-242, Winter.
    7. Susara Johanna Ferreira, 2019. "Is financial risk tolerance influenced by personality traits?," Proceedings of Economics and Finance Conferences 9511451, International Institute of Social and Economic Sciences.
    8. J. Lawrenson & Z. Dickason-Koekemoer & David McMillan, 2020. "A model for female South African investors’ financial risk tolerance," Cogent Economics & Finance, Taylor & Francis Journals, vol. 8(1), pages 1794493-179, January.
    9. Zhu, Alex Yue Feng, 2019. "Financial risk tolerance of Hong Kong adolescents: A hierarchical model," Children and Youth Services Review, Elsevier, vol. 102(C), pages 193-200.
    10. Heena Thanki & Sweety Shah & Vrajlal Sapovadia & Ankit D. Oza & Dumitru Doru Burduhos-Nergis, 2022. "Role of Gender in Predicting Determinant of Financial Risk Tolerance," Sustainability, MDPI, vol. 14(17), pages 1-13, August.

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