The purpose of this article is twofold. The first is to determine if the unobserved factors of behavioral loss tolerance and capacity to take a risk exist empirically. The second is to illustrate how these constructs individually and jointly can be used to explain financial decision-maker investment behavior. Using panel data collected in the United States between October 2020 and March 2021 (n = 265), findings from this study show that a financial decision-maker’s behavioral loss tolerance and risk capacity can be estimated and that these estimates can be used to build a risk profile that can then be used to describe subsequent investment behavior. When viewed from a descriptive framework perspective, those who exhibit more behavioral loss tolerance and greater risk capacity are more likely to hold a larger proportion of their portfolio in equities compared to other financial decision-makers.
Author: John E. Grable, PhD, CFP, holds an Athletic Association endowed professorship at the University of Georgia where he conducts research and teaches financial planning. Dr. Grable is best known for his work related to financial risk tolerance assessment and behavioral financial planning. He serves as the director of the Financial Planning Performance Laboratory.
Author: Amy Hubble, PhD, CFA, CFP, is the principal investment advisor at Radix Financial, LLC, specializing in research-based, long-term investment management and planning. Amy earned an MBA from the University of Oklahoma, a PhD in consumer economics and financial planning from the University of Georgia, and is both a CFA charterholder (CFA) and Certified Financial Planner (CFP).
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