Financial Risk Tolerance among Indian Investors: A Multiple Discriminant Modeling of Determinants

• Author: Manit Mishra,Sasmita Mishra
• DOI: http://doi.org/10.1002/jsc.2075
• Published date: 01 September 2016
• Date: 01 September 2016

RESEARCH ARTICLE

Strat. Change 25: 485–500 (2016)

Published online in Wiley Online Library

(wileyonlinelibrary.com) DOI: 10.1002/jsc.2075

Copyright © 2016 John Wiley & Sons, Ltd.

Strategic Change: Briengs in Entrepreneurial Finance

Strategic Change

DOI: 10.1002/jsc.2075

Financial Risk Tolerance among Indian Investors:

A Multiple Discriminant Modeling of Determinants

Manit Mishra

International Management Institute, Bhubaneswar, Odisha, India

Sasmita Mishra

Department of Business Management, CV Raman College of Engineering, Bhubaneswar,

Odisha, India

Above‐average risk tolerance is strongly associated with greater materialism,

younger age, and male gender, while a variety of characteristics comprising

materialism, age, gender, and ratio of earnings to total family members discriminate

between the risk tolerance levels of individual investors.

Researchers, particularly economists, have been fascinated with the construct of

risk for a long time, resulting in its profound dissection. Game theorists have

thrived on the concepts of risk and return in dierent rational decision‐making

situations. In fact, John von Neumann and Oskar Morgenstern invented a theory

that measured how much an individual is desirous of a return, by the size of the

risk she is willing to take to get it (Binmore, 2008, p. 8). Cox and Rich (1964)

identied the economic cost of acquisition as the most commonly discussed

element of risk. Later, Jacoby and Kaplan (1972) broadened the horizons of the

denition of risk and suggested ve independent types of risk: nancial, perfor-

mance, physical, psychological, and social. e present study pertains to the

nancial risk tolerance of an individual as indicated by their preference for dif-

ferent investment options – from the more risky ones to the less risky ones.

Grable (2000, p. 625) dened nancial risk tolerance as ‘the maximum amount

of uncertainty that someone is willing to accept when making a nancial deci-

sion.’ e construct of risk tolerance, or an individual’s attitude toward accepting

risk, has implications for nancial service providers as well as consumers. For

the former, a proper assessment of a prospective investor’s nancial risk tolerance

enables them to design a heterogeneous but appropriate product mix of invest-

ment options (Jacobs and Levy, 1996), while for the latter, it aids in oering

customized asset composition in a portfolio such that it is in accordance with

the risk and return expectations of the individual (Droms, 1987).

e present study oers a unique perspective on nancial risk tolerance, on

account of two aspects. First, it has been emphasized that risk tolerance is a

The risk tolerance of individual

investors is assessed by taking

into consideration the personality

trait of materialism and

socioeconomic particulars.

A multidimensional evaluation of

investor prole based on

materialism, age, and gender

would aid practitioners in precise

targeting of prospects.

Segregation of investors into

above‐average and below‐average

risk tolerance would facilitate

customization of a product mix to

suit the nancial temperament of

prospective investors.

486 Manit Mishra and Sasmita Mishra

Copyright © 2016 John Wiley & Sons, Ltd. Strategic Change

DOI: 10.1002/jsc

complicated process, going beyond demographic and

socioeconomic factors (Grable and Lytton, 1999b), and

researchers have seldom forayed beyond the demographic

determinants. is study includes the individual value of

materialism to investigate risk tolerance. It is pertinent

to mention here that both the constructs ‘nancial risk

tolerance’ and ‘materialism’ are dimensions of an indi-

vidual’s personality and both have a bearing on the deci-

sions related to the end use of disposable income. Second,

nancial risk tolerance has mostly been investigated as

an individual phenomenon. However, Indians take a

chronologically long‐term view of their investment deci-

sions, and the principal objective of investment is to do

one’s duty (‘dharma’) of providing for progeny (Jain and

Joy, 1996). e family has greater traction in inuencing

nancial risk tolerance for oriental investors than occi-

dental investors. Hence, the constitution of the family as

a unit in terms of number of earning members vs. total

number of members should play an important role in

the risk tolerance behavior of the earning members of

the family. Accordingly, the ratio of earning members to

total number of members in the family (E/T) for each

respondent has been included as an independent variable

dierentiating between above‐average and below‐average

risk tolerance groups. It acts as a more appropriate sub-

stitute for marital status/number of dependents in the

Indian context. is also broadens the horizons of risk

tolerance research by taking it beyond the normally used

socioeconomic determinants of age, gender, marital

status, income, and occupation.

e present study intended to fulll two objectives:

(a) to determine whether a set of socioeconomic param-

eters and an individual consumption value can distinguish

between levels of nancial risk tolerance, as individual

variables and as a weighted variate; and (b) to empirically

investigate the extent of the contribution of the individual

value of materialism and socioeconomic determinants

toward separation of above‐average risk tolerance inves-

tors from those having below‐average risk tolerance, as a

variate.

Review of the literature

Determinants of nancial risk tolerance

Demographic parameters such as gender, age, education,

income, occupation, etc. have been of particular interest

to researchers as independent variables shaping investors’

nancial risk tolerance (see MacCrimmon and Wehrung,

1986; Riley and Chow, 1992). An individual’s ability to

tolerate risk has been found to be contingent on charac-

teristics such as age, time horizon, liquidity needs, income,

investor knowledge, and attitude toward price uctua-

tions (Fredman, 1996). Despite a plethora of research on

the relationship of various socioeconomic factors with the

risk tolerance of individual investors, a brief assessment of

the results indicates a clear lack of consensus on the issue.

Grable and Lytton (1999b) carried out an exhaustive

investigation to assess the role of demographic, socioeco-

nomic, and attitudinal factors as determinants in shaping

nancial risk tolerance. e authors concluded that the

two most eective risk tolerance dierentiating factors are

education and nancial knowledge, with an investor’s

education explaining the greatest amount of variance in

the risk tolerance. Contrary to popular notions, the study

found that gender, age, and marital status had a lesser

impact on the risk tolerance of an individual. At the same

time, the study challenged the belief that the age of an

investor is negatively related to the investor’s risk toler-

ance. On the contrary, it found that the mean age of the

individuals in the above‐average risk category was greater

compared with the mean age in the below‐average risk

category.

In the Indian context, Purkayastha (2008) studied the

impact of demographic factors like age, occupation,

income, and number of dependents on risk tolerance. e

author concluded that younger investors and those with

a high income are more risk tolerant. However, in the

second stage of the research, the author attempted to

determine the actual investment pattern of customers

having a specic demographic prole and risk tolerance

level. Surprisingly, a reality check revealed that customers