Changes in Financial Risk Tolerance, 1983-2001

TLDR

Financial education is needed to help investors overcome the bias of overweighting recent events. The study investigates how financial risk tolerance levels have changed over time using six Survey of Consumer Finances datasets from 1983 to 2001. Logit analyses controlling for respondent and household characteristics were employed to test these changes. Risk tolerance fell from 1983 to 1989, remained unchanged until 1992, rose in 1995 and 1998, then fell again in 2001; it increases with higher stock returns and decreases with lower returns, potentially leading investors to buy when prices are high and sell when prices are low.

Abstract

Using six Survey of Consumer Finances cross-sectional datasets representing the years 1983-2001, this study investigates changes in financial risk tolerance levels over time. Logit analyses are performed to test changes in risk tolerance, controlling for respondent and household characteristics. Willingness to take some risk fell from 1983 to 1989, did not change from 1989 to 1992, increased in 1995, increased again in 1998, then decreased in 2001. Financial risk tolerance tends to increase when stock returns increase and decrease when stock returns decrease. This relationship could lead to buying when prices are high and selling when prices are low. Financial education is needed to help investors overcome the bias of overweighting recent events.