The Effects of Situational and Dispositional Factors on the Change in Financial Risk Tolerance

The Effects of Situational and Dispositional Factors on the Change in Financial Risk Tolerance

Jorge Ruiz-Menjivar (University of Georgia, USA), Wookjae Heo (University of Georgia, USA) and John E. Grable (University of Georgia, USA)
DOI: 10.4018/978-1-4666-7484-4.ch012
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Abstract

Utilizing the lens of Heider's (1958) attribution theory and Grable and Joo's (2004) conceptual framework, this chapter studies the effect of situational and dispositional attributions on changes in financial risk tolerance. Situational factors are assessed through changes in household situation and changes in macroeconomic factors. For dispositional factors, changes upon sensation seeking attitudes are explored. The data employed in this research come from the 1993, 1994, and 2006 National Longitudinal Survey of Youth (N = 5,449). Results from structural equation modeling indicate that changes in internal attributions have a significant and positive effect (coefficient = 0.12, p <0.01) on the change in risk tolerance, as is true for changes in external attributions where a significant effect is seen (coefficient = 0.30, p <0.01). Thus, the findings from this study support the conceptual framework premised on Heider's attribution theory and Grable and Joo's (2004) conceptual model.
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Background

Financial risk tolerance (FRT) is an important factor in the process of financial decision making under uncertainty. FRT refers to an individual’s attitude towards financial risk, and the willingness to undertake more financial risk for the potential of obtaining higher returns. Barsky et al. (1997) express financial risk tolerance as the inverse of risk aversion—as viewed from an expected utility theory. Faff, Mulino, and Chai (2008) evaluate the link between FRT and risk aversion. Their findings suggest that both concepts are associated to a significant degree, especially when using questions regarding gambling to measure such concepts—as is the case in this study.

Key Terms in this Chapter

Financial Risk Tolerance: The level of financial uncertainty an individual is willing to undertake for the potential of obtaining higher financial returns.

Situational Attributes: Factors pertinent to the individual’s environment or context, which includes social, economic, cultural, and familial situation and background.

Dispositional Attributes: Factors such as personality traits, beliefs, and attitudes that are intrinsic to the individual.

Change in Financial Risk Tolerance: The idea that financial risk tolerance is a fluid attitude through time. Such elasticity is attributed to factors such as market conditions and sentiment, and expectation about the economy.

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