| Peer-Reviewed

Determinants of Risk Tolerance

Received: 21 February 2014     Published: 30 March 2014
Views:       Downloads:
Abstract

Risk aversion is an important factor in explaining many everyday decisions. Thus, one asks which determinants can explain different attitudes towards risk. Several studies show different risk attitudes with respect to gender, age, income, and wealth (e.g. [19]). While these findings are hardly controversial, there is still some uncertainty about the effect of culture on risk tolerance. Thus, the main issue of this survey is to elaborate possible differences in risk preferences that are caused by cultural background. The main question in this context is whether religion or nationality are of importance for explaining risk attitudes. For this purpose, this study employs the German Socio-Economic Panel (GSOEP) to figure out differences in risk attitudes. Another contribution of this article is that is uses a generalized ordered logit model while others use simple linear regression models or simple logit or probit models which are not efficient. The estimations show that the cultural background does indeed have some impact on risk taking behaviour.

Published in International Journal of Economics, Finance and Management Sciences (Volume 2, Issue 2)
DOI 10.11648/j.ijefm.20140202.15
Page(s) 143-152
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2014. Published by Science Publishing Group

Keywords

Risk Tolerance, Cultural Background, Generalized Ordered Logit Model, Nationality, Religion

References
[1] Agnew, J., P. Balduzzi, and A. Sundén. 2003. "Portfolio Choice and Trading in a Large 401(k) Plan" The American Economic Review 93(1): 193-215.
[2] Arano, K., C. Parker, and R. L. Terry. 2010. "Gender-Based Risk Aversion and Retirement Asset Allocation" Economic Inquiry 48(1): 147-155.
[3] Arrow, K. J. 1971. Essays in the Theory of Risk-Bearing. Amsterdam: North-Holland Pub. Co.
[4] Bajtelsmit, V. L., A. Bernasek, and N. A. Jianakoplos. 1999. "Gender Differences in Defined Contribution Pension Decisions" Financial Services Review 8(1): 1–10.
[5] Bartke, S. and R. Schwarze, 2008. "Risk-Averse by Nation or by Religion? Some Insights on the Determinants of Individual Risk Attitudes" SOEPpapers No. 131.
[6] Benjamin, D. J., J. J. Choi, and A. Strickland. 2010. "Social Identity and Preferences" The American Economic Review 100(4): 1913–1928.
[7] Benjamin, D. J., J. J. Choi, and G. Fisher. 2010. "Religious Identity and Economic Behavior" NBER Working Paper No. 15925.
[8] Bertaut, C. C. 1998. "Stockholding Behavior of U.S. Households: Evidence from the 1983–1989 Survey of Consumer Finances" The Review of Economics and Statistics 80(2): 263-275.
[9] Brant, R. 1990. "Assessing Proportionality in the Proportional Odds Model for Ordinal Logistic Regression" Biometrics 46(4): 1171-1178.
[10] Brown, D. A. 2007. "Pensions and Risk Aversion: The Influence or Race, Ethnicity, and Class on Investor Behavior" Lewis and Clark Law Review 11(2): 385-406.
[11] Brunnermeier, M. K. and S. Nagel. 2008. "Do Wealth Fluctuations Generate Time-Varying Risk Aversion? Micro-Evidence on Individuals' Asset Allocation" The American Economic Review 98(3): 713-736.
[12] Cohen, A. and L. Einav. 2007. "Estimating Risk Preferences from Deductible Choice" The American Economic Review 97(3): 745-788.
[13] Cohn, R. A., W. G. Lewellen, R. Lease, and G. G. Schlarbaum. 2012. "Individual Investor Risk Aversion and Investment Portfolio Composition" The Journal of Finance 30(2): 605-620.
[14] Cole, S. A., A. Paulson, and G. K. Shastry. 2012. "Smart Money: The Effect of Education, Cognitive Ability, and Financial Literacy on Financial Market Participation" Harvard Business School Finance Working Paper No. 09-071.
[15] Coleman, S. 2003. "Risk Tolerance and the Investment Behavior of Black and Hispanic Heads of Household" Financial Counseling and Planning 14(2): 43-52.
[16] Croson, R. and U. Gneezy. 2009. "Gender Differences in Preferences" Journal of Economic Literature 47(2): 448–474.
[17] Cummings, L. L., D. L. Harnett, and O. J. Stevens. 1971. "Risk, Fate, Conciliation and Trust: An International Study of Attitudinal Differences among Executives" The Academy of Management Journal 14(3): 285-304.
[18] Dohmen, T., A. Falk, D. Huffman, and U. Sunde, U. 2010. "Are Risk Aversion and Impatience Related to Cognitive Ability?" The American Economic Review 100(3): 1238-1260.
[19] Dohmen, T., A. Falk, D. Huffman, U. Sunde, J. Schupp, and G. G. Wagner. 2011. "Individual Risk Attitudes: Measurement, Determinants, and Behavioral Consequences" Journal of the European Economic Association 9(3): 522–550.
[20] Fan, J. X. and J. J. Xiao. 2006. "Cross-Cultural Differences in Risk Tolerance: A Comparison between Chinese and Americans" Journal of Personal Finance 5(3): 54-75.
[21] Friend, I. and M. E. Blume. 1975. "The Demand for Risky Assets" The American Economic Review 65(5): 900-922.
[22] Grazier, S. and P. J. Sloane. 2008. "Accident Risk, Gender, Family Status and Occupational Choice in the UK" Labour Economics 15(5): 938–957.
[23] Guiso, L. and M. Paiella. 2004. "The Role of Risk Aversion in Predicting Individual Behavior" CEPR Discussion Paper 4591.
[24] Gutter, M. S., J. J. Fox, and C. P. Montalto. 1999. "Racial Differences in Investor Decision Making" Financial Services Review 8(3): 149–162.
[25] Halek, M. and J. G. Eisenhauer. 2001. "Demography of Risk Aversion" The Journal of Risk and Insurance 68(1): 1-24.
[26] Hilary, G. and K. W. Hui. 2009. "Does Religion Matter in Corporate Decision Making in America?" Journal of Financial Economics 93(3): 455-473.
[27] Hsee, C. K. and E. U. Weber. 1999. "Cross-National Differences in Risk Preference and Lay Predictions" Journal of Behavioral Decision Making 12(2): 165-179.
[28] Jaeger, D. A., H. Bonin, T. Dohmen, A. Falk, D. Huffman, and U. Sunde, U. 2010. "Direct Evidence on Risk Attitudes and Migration" The Review of Economics and Statistics 92(3): 684-689.
[29] Levy, H. 1994. "Absolute and Relative Risk Aversion: An Experimental Study" Journal of Risk and Uncertainty 8(3): 289-307.
[30] Miller, A. S. 2000. "Going to Hell in Asia: The Relationship between Risk and Religion in a Cross Cultural Setting" Review of Religious Research 42(1): 5-18.
[31] Miller, A. S. and J. P. Hoffmann. 1995. "Risk and Religion: An Explanation of Gender Differences in Religiosity" Journal for the Scientific Study of Religion 34(1): 63-75.
[32] Morin, R. A. and A. Fernandez Suarez. 1983. "Risk Aversion Revisited" The Journal of Finance 38(4): 1201-1216.
[33] Palsson, A.-M. 1996. "Does the Degree of Relative Risk Aversion Vary with Household Characteristics?" Journal of Economic Psychology 17(6): 771-787.
[34] Riley, W. B. and K. V. Chow. 1992. "Asset Allocation and Individual Risk Aversion" Financial Analysts Journal 48(6): 32-37.
[35] Salacuse, J. W. 1998. "Ten Ways that Culture Affects Negotiating Style: Some Survey Results" Negotiation Journal 14(3): 221–240.
[36] Shaw, K. L. 1996. "An Empirical Analysis of Risk Aversion and Income Growth" Journal of Labor Economics 14(4): 626-653.
[37] Siegel, F. W. and J. P. Hoban Jr. 1982. "Relative Risk Aversion Revisited" The Review of Economics and Statistics 64(3): 481-487.
[38] Sundén, A. E. and J. Surette. 1998. "Gender Differences in the Allocation of Assets in Retirement Savings Plans" The American Economic Review 88(2): 207-211.
[39] Sung, J. and S. Hanna. 1996. "Factors Related To Risk Tolerance" Financial Counseling and Planning 7(1): 11-19.
[40] Tanaka, T., C. F. Camerer, and Q. Nguyen. 2010. "Risk and Time Preferences: Linking Experimental and Household Survey Data from Vietnam" The American Economic Review 100(1): 557-571.
[41] Wagner, G. G., J. R. Frick, and J. Schupp. 2007. "The German Socio-Economic Panel Study (SOEP) – Scope, Evolution and Enhancements" Schmollers Jahrbuch 127(1): 139-169.
[42] Wang, M. and P. S. Fischbeck. 2008. "Evaluating Lotteries, Risks, and Risk-mitigation Programs" Journal of Risk Research 11(6): 775–795.
[43] Weber, E. U. and C. Hsee. 1998. "Cross-Cultural Differences in Risk Perception, but Cross-Cultural Similarities in Attitudes towards Perceived Risk" Management Science 44(9): 1205-1217.
[44] Williams, R. 2006. "Generalized Ordered Logit/Partial Proportional Odds Models for Ordinal Dependent Variables" The Stata Journal 6(1): 58–82.
Cite This Article
  • APA Style

    Christoph S. Weber. (2014). Determinants of Risk Tolerance. International Journal of Economics, Finance and Management Sciences, 2(2), 143-152. https://doi.org/10.11648/j.ijefm.20140202.15

    Copy | Download

    ACS Style

    Christoph S. Weber. Determinants of Risk Tolerance. Int. J. Econ. Finance Manag. Sci. 2014, 2(2), 143-152. doi: 10.11648/j.ijefm.20140202.15

    Copy | Download

    AMA Style

    Christoph S. Weber. Determinants of Risk Tolerance. Int J Econ Finance Manag Sci. 2014;2(2):143-152. doi: 10.11648/j.ijefm.20140202.15

    Copy | Download

  • @article{10.11648/j.ijefm.20140202.15,
      author = {Christoph S. Weber},
      title = {Determinants of Risk Tolerance},
      journal = {International Journal of Economics, Finance and Management Sciences},
      volume = {2},
      number = {2},
      pages = {143-152},
      doi = {10.11648/j.ijefm.20140202.15},
      url = {https://doi.org/10.11648/j.ijefm.20140202.15},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijefm.20140202.15},
      abstract = {Risk aversion is an important factor in explaining many everyday decisions. Thus, one asks which determinants can explain different attitudes towards risk. Several studies show different risk attitudes with respect to gender, age, income, and wealth (e.g. [19]). While these findings are hardly controversial, there is still some uncertainty about the effect of culture on risk tolerance. Thus, the main issue of this survey is to elaborate possible differences in risk preferences that are caused by cultural background. The main question in this context is whether religion or nationality are of importance for explaining risk attitudes. For this purpose, this study employs the German Socio-Economic Panel (GSOEP) to figure out differences in risk attitudes. Another contribution of this article is that is uses a generalized ordered logit model while others use simple linear regression models or simple logit or probit models which are not efficient. The estimations show that the cultural background does indeed have some impact on risk taking behaviour.},
     year = {2014}
    }
    

    Copy | Download

  • TY  - JOUR
    T1  - Determinants of Risk Tolerance
    AU  - Christoph S. Weber
    Y1  - 2014/03/30
    PY  - 2014
    N1  - https://doi.org/10.11648/j.ijefm.20140202.15
    DO  - 10.11648/j.ijefm.20140202.15
    T2  - International Journal of Economics, Finance and Management Sciences
    JF  - International Journal of Economics, Finance and Management Sciences
    JO  - International Journal of Economics, Finance and Management Sciences
    SP  - 143
    EP  - 152
    PB  - Science Publishing Group
    SN  - 2326-9561
    UR  - https://doi.org/10.11648/j.ijefm.20140202.15
    AB  - Risk aversion is an important factor in explaining many everyday decisions. Thus, one asks which determinants can explain different attitudes towards risk. Several studies show different risk attitudes with respect to gender, age, income, and wealth (e.g. [19]). While these findings are hardly controversial, there is still some uncertainty about the effect of culture on risk tolerance. Thus, the main issue of this survey is to elaborate possible differences in risk preferences that are caused by cultural background. The main question in this context is whether religion or nationality are of importance for explaining risk attitudes. For this purpose, this study employs the German Socio-Economic Panel (GSOEP) to figure out differences in risk attitudes. Another contribution of this article is that is uses a generalized ordered logit model while others use simple linear regression models or simple logit or probit models which are not efficient. The estimations show that the cultural background does indeed have some impact on risk taking behaviour.
    VL  - 2
    IS  - 2
    ER  - 

    Copy | Download

Author Information
  • Institute of Economics, University of Erlangen-Nuremberg, Germany

  • Sections