Academic journal article Financial Services Review

The Impact of Family Relationships and Financial Education on Financial Risk Tolerance

Academic journal article Financial Services Review

The Impact of Family Relationships and Financial Education on Financial Risk Tolerance

Article excerpt

Abstract

This study explores how family relationships and financial education impact financial risk tolerance using a sample of college freshmen and their parents. No significant relationship is found between the financial risk tolerance of parents and their children. However, husbands are significantly more risk tolerant than their wives. There is also a strong correlation between the risk tolerance of the spouses, after controlling for gender, income, and education. In addition, college students who had some financial education in high school are found to be more risk tolerant, especially when they played a stock market game as part of a course. © 2011 Academy of Financial Services. All rights reserved.

JEL classification: A21; D14; I22; J12; J13

Keywords: Risk tolerance; Financial education; Family relationships; Marital relationship; Parent-child differences

1. Introduction

Given its important role in the financial planning and investment processes, financial risk tolerance (FRT) has been the focus of many research papers in recent years. A number of studies have examined the impact of variables such as gender, income level, wealth, education level, age, and type of employment. While these variables have often been shown to have a significant impact on FRT, they only provide a partial explanation of the variance in FRT. There are still a number of variables that may be important determinants of FRT, but have received much less attention.

The role of financial education in the determination of FRT is one area that has not received much attention. A couple of studies have examined financial knowledge as a determinant of FRT and have found that financial knowledge is associated with increased FRT (Grable, 2000; Grable & Joo, 1997). When combined with research that that suggests increased FRT leads to larger wealth accumulation for retirement (e.g., Bajtelsmit, Bernasek, & Jianakoplos, 1999; Hariharan, Chapman, & Domian, 2000; Yuh & DeVaney, 1996), the results point to the potentially significant role of financial education early in a person's life. However, differences in FRT resulting from financial education while an adolescent have yet to be examined.

The impact of family relationships on FRT is another area in which further study is merited. While there is some limited research examining spousal relationships in FRT (e.g., Gilliam, Goetz, & Hampton, 2008; Roszkowski, Delaney, & Cordell, 2004), there do not appear to be any studies that investigate the parent/child relationship. Such relationships may be important factors that a financial planner should consider when advising clients.

This paper explores how high-school financial education and family relationships affect FRT in a sample of new college freshmen and their parents, and the amount of variance explained by these variables above and beyond the variance explained by previously studied variables such as gender, income, and education level.

2. Literature review

2.1. Commonly studied correlates of financial risk tolerance

A fair amount of research has been devoted to gaining an understanding of the factors that impact an individual's FRT. While the methods used to measure FRT have varied widely across studies, many of the results have been consistent. Consider, for example, the research that examines the relationship between gender and FRT. These studies incorporate a variety FRT measures such as the Survey of Consumer Finances (SCF), different types of investment and insurance decisions, and various survey instruments. Yet, despite diverse methodologies, the research consistently finds that females tend to be more risk averse than males (Bajtelsmit & Bernasek, 1996; Bajtelsmit et al., 1999; Chaulk, Johnson, & Bulcroft, 2003; Embrey & Fox, 1997; Grable, 2000; Grable & Lytton, 1998; Grable, Lytton, & O'Neill, 2004; Hallaban, Faff, & McKenzie, 2004; Hariharan et al. …

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