K-State Professor Conducts Kansas-Oriented Study Assessing Financial Risk Tolerance
Thursday, April 13, 2006
MANHATTAN -- A study by a Kansas State University professor has found that people are good at assessing their risk tolerance when it comes to their finances -- but that they could do better.
Risk tolerance means how much risk a person is able, or tolerant, to take, according to John Grable, an associate professor of family studies and human services with K-State's personal financial planning program.
The risk tolerance research performed by Grable and colleagues received the best financial planning paper award at a recent conference in Baltimore by the American Council on Consumer Interests. The award was sponsored by the Certified Planner Board of Standards.
Grable's study looked at how well people can advance their own risk tolerance, something of importance when making decisions about retirement. People determine their form of investment based on an assessment of their own risk tolerance, he said.
Participants from Abilene, Lawrence and Manhattan were asked to assess their own risk tolerance and were given a standardized risk questionnaire. Researchers also looked at a person's self-assessment of his or her ability to take risks and compared it to the financial portfolios the person actually held.
Age and gender differences were present in the results, Grable said. "Men tended to have a higher financial risk tolerance than women," he said. "Those with more education and more annual house income also were more risk tolerant."
A surprising factor was the fact that older generations tended to have a higher risk tolerance than younger people -- something many would think would be the opposite, Grable said.
"What we're finding is that with age comes knowledge," he said. "The more knowledgeable you are about personal financial issues, the more risk tolerant you are."
Gained personal experience can also be beneficial, Grable said. Those who grew up during the Great Depression tend to save money and will typically invest in safe, secure, federally guaranteed types of investments. Those who grew up in the '80s and '90s will typically invest in the stock market, which can fluctuate, he said.
Grable recommends that older generations invest conservatively because they don't have as much time to recoup a financial loss, while younger generations have more time to recover. However, Grable said that does not mean older generations should stay completely away from the stock market. Instead, he recommends they keep a well-balanced financial portfolio.
Younger generations should take a personal finance course and read books on personal financial issues to learn as much as possible, Grable said.
"Again, with knowledge comes increased risk tolerance," he said. "That is really one of the key factors -- the more knowledge you gain, the more secure you feel when making a risky decision."