Academic journal article International Journal of Business and Society

Determinants of Risk Tolerance on Financial Asset Ownership: A Case of Malaysia

Academic journal article International Journal of Business and Society

Determinants of Risk Tolerance on Financial Asset Ownership: A Case of Malaysia

Article excerpt

ABSTRACT

The present study intends to shed new light on the issue of determinants of risk tolerance among Malaysians using data obtained from a survey. The main analysis is based on ordinary least square (OLS) method of regression using level of financial risk tolerance as the dependent variable and socio-economic factors as regressors. The preliminary analyses found that majority of the respondents prefer to keep their money in liquid assets, such as in saving account and cash. These assets definitely have the lowest level of risk compared to other forms of assets. A further analysis, using OLS regression reveals several significant determinants of risk tolerance among the sample respondents. Risk tolerance is higher among the young, males, those with higher level of education and those in non-public sector. In addition, the study also finds that Malays are more risk averse than Chinese and those in Kedah are more risk averse than those in Kuala Lumpur.

Keywords: Financial assets; Malaysians; Risk tolerance

1. INTRODUCTION

Risk pervades everyday life of human being. Risk, whether in form of the weather, price fluctuations, or illness, has been part of human society. Any definition of risk is likely to carry an element of subjectivity, depending upon the nature of the risk and to what it is applied. As such, there is no all encompassing definition of risk. The Royal Society (1983), for example, view risk as the probability "...that a particular adverse event occurs during a stated period of time, or results from a particular challenge". Smith (1999) defines risk as a decision expressed by a range or possible outcomes with attached probabilities. When there is a range or possible outcomes but no assumed probabilities, there is only uncertainty. Hertz and Thomas (1984) have suggested that "...risk means uncertainty and the results of uncertainty....risk refers to a lack of predictability about problem structure, outcomes or consequences in a decision or planning situation".

Beside the fact that risk is always postulated as the philosophy concerned with the understanding of the nature of harm associated with the hazard (The Royal Society, 1983), risk is often associated with many beneficial economic ventures especially for households. Households have variety of choices in allocating their savings/money in different types of financial forms. The choice could range from the lowest risk to the highest risk types of financial forms. This choice also implies different levels of risk tolerance among individuals. Some households are more risk averse than the others. The challenge for households who opt for risky financial assets, however, is basically how to manage the risks. In other words, households have to learn how to live with risk not through blithe acceptance but through managing risk by mitigating its consequences. Risk could be managed through precautionary accumulation of buffer stocks and savings, which can be drawn during times of economic hardship. This is called selfinsurance. Or it could be managed through cross-insurance, which refers to implicit or explicit arrangements for households with positive income shocks to send resources to households with negative income shocks (Ariyapruchya et.al, n.d)

Knowing the fact that the propensity of households to diversify their portfolios is very relevant for policymakers and financial industry, it is crucial to know whether risk aversion is indeed the dominating factor in a household's financial choices. The Markets in Financial Instruments Directive (MiFiD) of the European Commission, for example, requires financial advisors to identify customer risk preferences and to customize their advice according to these preferences (European Commission, 2006). Typically, this identification takes place by way of selfdisclosure of the individual's risk attitude. In the theoretical literature, it is generally thought that an investor with high risk aversion will maintain a more diversified portfolio in order to minimize the variance of returns (e. …

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