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

Abstract

Over a decade ago, Grable and Lytton (1999) developed, tested, and published a financial risk-tolerance scale in Financial Services Review that has since been widely used by consumers, financial advisers, and researchers to evaluate a person's willingness to engage in a risky financial behavior. Analysis of data (n = 160,279) spanning the timeframe 2007 to 2013 provides evidence that the risk-tolerance scale's reliability and validity have remained robust since the scale was first developed. The scale's estimated Cronbach's α was 0.77 during this time period. Consistent with the literature, high scale scores (representing a greater willingness to take risks) were found to be associated with equity ownership and negatively related to cash and bond holdings. © 2015 Academy of Financial Services. All rights reserved.

Jel classification: D. Microeconomics: D81 Criteria for Decision-Making under Risk & Uncertainty

Keywords: Risk; Risk tolerance; Risk scale; Risk scoring; Risk assessment

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). …

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