The Academy of Financial Services 35th Annual Meeting

financial risk tolerance, propensity measures, stated preferences, revelated preferences

Abstract. This study was designed to answer the following questions using data from a panel study conducted between October 2020 and March 2021: (a) How stable is risk tolerance across periods; (b) What factors can be used to predict the future risk tolerance of a financial decision maker; and (c) Which type of risk-tolerance assessment method offers the best prediction power in identifying future portfolio choices? Findings from this study show that risk-tolerance scores derived from a scale developed using psychometric principles (i.e., a propensity measure) offer the most accurate insight into a financial decision maker’s current and future willingness to take risk as well as future equity portfolio choices. Results also suggest that for those who need a simple measurement of current and future risk tolerance and portfolio allocation behavior, a stated-preference item can be useful. Findings from this study also indicate that while valid in predicting subsequent risk tolerance and future behavior, scores from revealed-preference tests are less reliable and valid.