The Indicators of Risk

Abstract

Theoretically, financial risk tolerance depends upon different dimensions of risk. Some commentators (Cordell, 2002) have defined the term ‘risk tolerance’ to mean a combination of both ‘risk attitude’ (how much risk I choose to take) and ‘risk capacity’ (how much risk I can afford to take) (Roszkowski et al.). The first empirical goal of this study is to compare levels of financial risk tolerance which are obtained through alternative measurements: a traditional financial risk tolerance test, a psychophysiological test and the analysis of real life financial decisions. When using the financial risk tolerance test, we rely upon the self-evaluation of individuals; the computation from this test returns a biased risk tolerance level (BR). The second tool should provide a more objective evaluation of risk tolerance, given the fact that it relies on risky choices influenced by spontaneous somatic responses; it should return an unbiased risk tolerance level (UR). Finally, we considered the real life financial decisions of individuals obtaining a measure of the risk tolerance effectively assumed (the real life risk, RLR). Therefore we have the chance to compare how coherent RLR is in relation to both BR and UR.