Decomposing the age effect on risk tolerance

The importance of investment portfolio allocation has become more apparent since the onset of the late 2000s Great Recession. Individual willingness to take financial risks affects portfolio decisions and investment returns among other factors. Previous research found that people of different ages have dissimilar levels of risk tolerance but the effects of generation, period, and aging were confounded. Using the 1998–2007 Survey of Consumer Finances cross-sectional datasets, this study uses an analytical method to separate such effects on financial risk tolerance. Aging and period effects on financial risk tolerance were statistically significant. Implications for researchers and financial planning practitioners and educators are provided.

► We use an analytical method to decompose the age effect on risk tolerance. ► Risk tolerance generally decrease as people age. ► Socioeconomic environments influence risk tolerance. ► Perceptions and demographic and economic characteristics affect risk tolerance.