Academic journal article Financial Services Review

The Grable and Lytton Risk-Tolerance Scale: A 15-Year Retrospective

Academic journal article Financial Services Review

The Grable and Lytton Risk-Tolerance Scale: A 15-Year Retrospective

Article excerpt

1. Introduction

In 1999, Grable and Lytton published an article in Financial Services Review that presented a 13-item financial risk-tolerance scale that has, according to Google Scholar Analytics (Google, 2014), been referenced in hundreds of research publications. The scale, which is available online through Rutgers New Jersey Agricultural Experiment Station (https://njaes.rutgers.edu/money/riskquiz/), has been used by over 200,000 consumers, educators, and researchers. When the Grable and Lytton (G&L) risk scale was first published, there were few publically available measures of financial risk tolerance. Those that did exist tended to be based on income gambles, choice dilemmas, or demographically driven heuristics. The Grable and Lytton article was among the first to provide published risk scale reliability and validity estimates. Since first being published, the scale has been adopted as a client data intake instrument by a variety of firms operating in the financial and investment planning domain. Financial advisers often use the measure when providing comprehensive planning services as a way to measure and understand their clients' risk attitudes before allocating client assets. For individuals, the risk scale is often used to understand their own willingness to take financial risk and analyze investment preferences.

The purpose of this article is to provide a 15-year anniversary review of the G&L scale. Specifically, this article provides readers with data regarding historical scale response patterns and reliability and validity estimates. As will be shown below, the scale has held up relatively well as a consumer tool and research instrument since first being introduced to the public. This article adds additional evidence that the scale, whereas certainly not perfect, does provide financial planning practitioners and researchers with an acceptable, valid, and reliable assessment of a person's willingness to take financial risk.

2. Background review

2.1. Development of the scale

When Grable and Lytton (1999) set out to measure financial risk tolerance they were originally faced with the challenge of finding questions that (1) were germane to the concept of risk, (2) would allow anyone to combine question answers into a risk scale, (3) were relevant to situations faced by typical consumers making financial decisions, (4) were easy to administer, and (5) offered both validity and reliability when combined into a scale. Grable and Lytton used guidance provided by MacCrimmon and Wehrung (1986) to help identify and develop appropriate questions. These requirements included ensuring that (1) the multidimensionality of risk tolerance was assessed through the inclusion of simple and complex situational items, (2) the items were consistent and not redundant, (3) the items were interesting to answer, and (4) completion times would be reasonably short.

Their efforts at building a financial risk-tolerance assessment tool were based primarily on scale development theory and propositions found in Modern Portfolio Theory (MPT). In Markowitz's 1952 article describing the basis of MPT, the theoretical relationship between risk and investment returns was clearly outlined. Markowitz noted that risk and return are positively related, and as such, investors who demand a higher return must be willing to accept a higher level of risk (i.e., volatility) in their portfolios. This insight has since been used as a key benchmark of validity whenever a risk-assessment tool has been created. Grable and Lytton (1999) noted that, as such, any new and useful risk-tolerance measure must align with the prediction that high scores will correspond with a general willingness to take more financial risk. In the context of a financial risk-tolerance scale, risk scores should be positively associated with, say, equity ownership. In addition to this baseline measure of validity, a scale ought to exhibit strong psychometric characteristics. …

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