Dr. Amy Hubble and Dr. John Grable wrote the attached paper in late 2019. The paper was discussed in The Wall Street Journal. The paper has since gone on to be one of the most requested papers from the Lab. Unfortunately, the paper is difficult to obtain via the internet.
The attached copy is an “author proof.” To access the final version of the paper please consider subscribing to the Journal of Investing.
This post is really short …
If you would like to learn more about financial risk profiling, we strongly recommend that you download the following paper. This paper describes how Drs. Hubble and Grable, working with the CFA Institute, arrived at a model of risk profiling that can be used by financial planners.
https://www.cfainstitute.org/en/research/foundation/2017/financial-risk-tolerance
A retrospective review of the Grable and Lytton Risk Scale will be published later this year in Financial Services Review, one of the premier academic financial planning journals. Here is the paper’s abstract:
“Over a decade ago, Grable and Lytton (1999) developed, tested, and published a financial risk-tolerance scale in Financial Services Review that has since been widely used by consumers, financial advisers, and researchers to evaluate a person’s willingness to engage in a risky financial behavior. Analysis of data (n = 160,279) spanning the timeframe 2007 to 2013 provides evidence that the risk-tolerance scale’s reliability and validity have remained robust since the scale was first developed. The scale’s estimated Cronbach’s alpha was .77 during this time period. Consistent with the literature, high scale scores (representing a greater willingness to take risks) were found to be associated with equity ownership and negatively related to cash and bond holdings.”
The scale can be accessed at the following site: http://njaes.rutgers.edu:8080/money/riskquiz/
The financial risk tolerance team discovered something interesting today. The team has been tracking the daily financial risk tolerance of individuals since late 2007. Initial results from the lab suggest that the market does influence people’s willingness to take financial risk. The strongest link is between daily stock market volatility and risk-tolerance scores. When market volatility is up, risk scores drop. When volatility falls, risk scores go up. Generally, people are more likely to increase their tolerance for risk over time.
While these initial results are interesting, the FPP Lab Director, Dr. John Grable, noted, “It looks like the change in risk scores is actually rather small. This means that even though the markets appear to have an influence on subsequent risk attitudes, the actual change in tolerance for risk is not large enough to significantly alter current or future investment choices.”
The research team is currently engaged in a neural pathway analysis to identify other patterns in risk attitudes. Check back for results as they become available.