2024 Theses Doctoral

The Relationship of Wealth, Financial Literacy and Relative Financial Well-Being to Self-Assessed Risk Tolerance: A Secondary Analysis

Hui, Roslyn Yuk-Bo

This paper explores factors related to self-assessed risk tolerance, focusing on its relationship to wealth, financial literacy, financial well-being relative to parents’ financial well-being at the respective age, and financial well-being relative to one’s historical self. Additional predictors included age and education. The analyses were conducted using data from the Federal Reserve Board’s 2019 Survey of Household Economics and Decision-making (SHED).

The measure of financial literacy was constructed from several survey items assessing knowledge of investing and interest rates. A multinomial logistic regression model confirmed that all of the abovementioned variables are indeed significant contributors to the prediction of self-assessed risk tolerance. Wealth is positively related to self-assessed risk tolerance, as predicted by Bernoullian utility theory. Age exhibits a non-linear relationship with risk tolerance. Both financial well-being relative to parents’ financial well-being at the same age and financial well-being relative to one’s historical self exhibit a positive relationship with risk tolerance.

Lastly, those with higher financial literacy scores tend to have higher risk tolerance, as did those with more education. Some implications of the findings are discussed.