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Financial Risk Tolerance among Indian Investors: A Multiple Discriminant

Modeling of Determinants

Article in Strategic Change · September 2016

DOI: 10.1002/jsc.2075

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Strat. Change 25: 485–500 (2016)
Published online in Wiley Online Library
(wileyonlinelibrary.com) DOI: 10.1002/jsc.2075 RESEARCH ARTICLE

Financial Risk Tolerance among Indian Investors:

A Multiple Discriminant Modeling of Determinants
Manit Mishra
International Management Institute, Bhubaneswar, Odisha, India
Sasmita Mishra
Department of Business Management, CV Raman College of Engineering, Bhubaneswar,
Odisha, India

The risk tolerance of individual

investors is assessed by taking
A bove‐average risk tolerance is strongly associated with greater materialism,
younger age, and male gender, while a variety of characteristics comprising
materialism, age, gender, and ratio of earnings to total family members discriminate
into consideration the personality
trait of materialism and between the risk tolerance levels of individual investors.
socioeconomic particulars.

A multidimensional evaluation of
investor profile based on
materialism, age, and gender
would aid practitioners in precise
targeting of prospects.
Segregation of investors into
above‐average and below‐average
risk tolerance would facilitate
customization of a product mix to
suit the financial temperament of
prospective investors.
Researchers, particularly economists, have been fascinated with the construct of
risk for a long time, resulting in its profound dissection. Game theorists have
thrived on the concepts of risk and return in different rational decision‐making
situations. In fact, John von Neumann and Oskar Morgenstern invented a theory
that measured how much an individual is desirous of a return, by the size of the
risk she is willing to take to get it (Binmore, 2008, p. 8). Cox and Rich (1964)
identified the economic cost of acquisition as the most commonly discussed
element of risk. Later, Jacoby and Kaplan (1972) broadened the horizons of the
definition of risk and suggested five independent types of risk: financial, perfor-
mance, physical, psychological, and social. The present study pertains to the
financial risk tolerance of an individual as indicated by their preference for dif-
ferent investment options – from the more risky ones to the less risky ones.
Grable (2000, p. 625) defined financial risk tolerance as ‘the maximum amount
of uncertainty that someone is willing to accept when making a financial deci-
sion.’ The construct of risk tolerance, or an individual’s attitude toward accepting
risk, has implications for financial service providers as well as consumers. For
the former, a proper assessment of a prospective investor’s financial risk tolerance
enables them to design a heterogeneous but appropriate product mix of invest-
ment options (Jacobs and Levy, 1996), while for the latter, it aids in offering
customized asset composition in a portfolio such that it is in accordance with
the risk and return expectations of the individual (Droms, 1987).
The present study offers a unique perspective on financial risk tolerance, on
account of two aspects. First, it has been emphasized that risk tolerance is a

Copyright © 2016 John Wiley & Sons, Ltd. Strategic Change

Strategic Change: Briefings in Entrepreneurial Finance DOI: 10.1002/jsc.2075
486 Manit Mishra and Sasmita Mishra
complicated process, going beyond demographic and
socioeconomic factors (Grable and Lytton, 1999b), and
researchers have seldom forayed beyond the demographic
determinants. This study includes the individual value of
materialism to investigate risk tolerance. It is pertinent
to mention here that both the constructs ‘financial risk
tolerance’ and ‘materialism’ are dimensions of an indi-
vidual’s personality and both have a bearing on the deci-
sions related to the end use of disposable income. Second,
financial risk tolerance has mostly been investigated as
an individual phenomenon. However, Indians take a
chronologically long‐term view of their investment deci-
sions, and the principal objective of investment is to do
one’s duty (‘dharma’) of providing for progeny (Jain and
Joy, 1996). The family has greater traction in influencing
financial risk tolerance for oriental investors than occi-
dental investors. Hence, the constitution of the family as
a unit in terms of number of earning members vs. total
number of members should play an important role in
the risk tolerance behavior of the earning members of
the family. Accordingly, the ratio of earning members to
total number of members in the family (E/T) for each
respondent has been included as an independent variable
differentiating between above‐average and below‐average
risk tolerance groups. It acts as a more appropriate sub-
stitute for marital status/number of dependents in the
Indian context. This also broadens the horizons of risk
tolerance research by taking it beyond the normally used
socioeconomic determinants of age, gender, marital
status, income, and occupation.
The present study intended to fulfill two objectives:
(a) to determine whether a set of socioeconomic param-
eters and an individual consumption value can distinguish
between levels of financial risk tolerance, as individual
variables and as a weighted variate; and (b) to empirically
investigate the extent of the contribution of the individual
value of materialism and socioeconomic determinants
toward separation of above‐average risk tolerance inves-
tors from those having below‐average risk tolerance, as a
variate.
Copyright © 2016 John Wiley & Sons, Ltd.
Review of the literature
Determinants of financial risk tolerance
Demographic parameters such as gender, age, education,
income, occupation, etc. have been of particular interest
to researchers as independent variables shaping investors’
financial risk tolerance (see MacCrimmon and Wehrung,
1986; Riley and Chow, 1992). An individual’s ability to
tolerate risk has been found to be contingent on charac-
teristics such as age, time horizon, liquidity needs, income,
investor knowledge, and attitude toward price fluctua-
tions (Fredman, 1996). Despite a plethora of research on
the relationship of various socioeconomic factors with the
risk tolerance of individual investors, a brief assessment of
the results indicates a clear lack of consensus on the issue.
Grable and Lytton (1999b) carried out an exhaustive
investigation to assess the role of demographic, socioeco-
nomic, and attitudinal factors as determinants in shaping
financial risk tolerance. The authors concluded that the
two most effective risk tolerance differentiating factors are
education and financial knowledge, with an investor’s
education explaining the greatest amount of variance in
the risk tolerance. Contrary to popular notions, the study
found that gender, age, and marital status had a lesser
impact on the risk tolerance of an individual. At the same
time, the study challenged the belief that the age of an
investor is negatively related to the investor’s risk toler-
ance. On the contrary, it found that the mean age of the
individuals in the above‐average risk category was greater
compared with the mean age in the below‐average risk
category.
In the Indian context, Purkayastha (2008) studied the
impact of demographic factors like age, occupation,
income, and number of dependents on risk tolerance. The
author concluded that younger investors and those with
a high income are more risk tolerant. However, in the
second stage of the research, the author attempted to
determine the actual investment pattern of customers
having a specific demographic profile and risk tolerance
level. Surprisingly, a reality check revealed that customers
Strategic Change
DOI: 10.1002/jsc
 Financial Risk Tolerance among Indian Investors
prefer to invest their money in an average‐risk mutual
fund, irrespective of their demographic profile and risk
tolerance capability.
While it is not expected that there would be a con-
formance in the findings of research carried out in diverse
geographic regions using dissimilar research methods,
nevertheless the disparity in findings is disconcerting. It
brings to the fore the lack of conclusive evidence, and
therefore unanimity, amongst researchers on the relation-
ship between financial risk tolerance and socioeconomic
variables. More importantly, it presents a reservoir of
research opportunities to explore the unknown. The
remaining portion of this literature review elucidates the
findings related to the impact of individual socioeconomic
determinants on financial risk tolerance.
Age
Investors belonging to different age groups are known to
vary significantly with regard to their choice of invest-
ment. Young investors (26–35) have been found to prefer
mutual funds, while middle‐aged investors (36–45) have
shown an inclination toward debentures/bonds as invest-
ment options (Mittal and Vyas, 2007). Wallach and
Kogan (1961) are believed to be pioneers in studying the
relationship between risk tolerance and age. Their early
experimental research used choice dilemmas, which indi-
cated that older individuals were less risk tolerant than
younger individuals. This can be explained inductively by
the fact that older individuals have less time to recover
losses from riskier investments than do younger individu-
als, and as such, risk tolerance decreases with age. Harlow
and Brown (1990) added another supporting justification
by suggesting that biological transformations due to the
process of ageing may also be responsible for making
individuals less risk tolerant as they grow old. An inverse
relationship between risk tolerance and age is substanti-
ated by the works of many researchers (Dahlback, 1991;
Jagannathan and Kocherlakota, 1996). The findings tend
to build on the argument that, as an individual grows old,
her stream of future income decreases, diminishing the
Copyright © 2016 John Wiley & Sons, Ltd.
487
value of the human capital endowed. Therefore, individu-
als tend to offset this decline in the value of their human
capital by reducing the risk of their financial portfolio.
Riley and Chow (1992) took research into the rela-
tionship between risk tolerance and age to an altogether
new level by arguing that the relationship may not neces-
sarily be linear. They found that risk tolerance increases
with age until five years prior to retirement, and then
decreases with age. This contention was supported by Hal-
lahan et al. (2004), who found evidence of a negative (but
non‐linear) relationship between risk tolerance and age.
However, the inverse relationship between age and
risk tolerance is debatable, since there are conclusions to
the contrary wherein researchers have either found no
significant relationship or a positive relationship (e.g.,
Grable, 2000; Hanna et al., 1998; Hariharan et al., 2000).
Wang and Hanna (1997) carried out a profound study on
the association between risk tolerance and age. The risk
tolerance of an individual was measured by calculating the
ratio of risky assets to total wealth, wherein an asset was
considered risky if it provided an uncertain nominal cash
flow (e.g., real estate, business assets, mutual funds, cor-
porate stocks, precious metals, and pension assets in the
form of stocks, bonds, or mutual funds). The authors
concluded that risk tolerance increases with age, since the
present financial resources of young people are limited
and future wealth cannot be used to pay for present
expenses, keeping other sociodemographic variables
constant.
The varied findings indicate that age, all by itself, may
not be contributing to risk tolerance. A better understand-
ing of the relationship is possible through concurrent
consideration of a number of socioeconomic variables and
individual values, including age.
Gender
In comparison with age, the association between risk tol-
erance and gender is comparatively much less debatable.
Grable and Lytton (1997) investigated the financial atti-
tudes of adults and suggested that men have a greater
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488 Manit Mishra and Sasmita Mishra
tolerance toward risk compared with their female compa-
triots. Sung and Hanna (1996) concluded that house-
holds headed by a female member are less risk tolerant in
comparison with households headed by a male member
or a married couple. An extensive study on the role of
gender in financial risk tolerance, with specific reference
to students, was carried out by Garrison and Gutter
(2010). Using a stratified random sample of 15,797 stu-
dents drawn from 15 universities across the USA, the
authors concluded that female students tend to exhibit
lower financial risk tolerance from the moment they are
expected to manage their own finances. Hallahan et al.
(2004), in a study involving multiple demographic vari-
ables, found that women displayed a lower level of finan-
cial risk tolerance compared with men. Overall, there
seems to be unanimity among researchers that men tend
to exhibit greater financial risk tolerance compared with
women, even though independence in taking financial
decisions plays a role.
Marital status/number of dependents
Roszkowski et al. (1993) suggested that the number of
dependents is inversely proportional to risk tolerance,
since individuals with greater responsibilities act with
more caution. In addition, individuals having a greater
number of dependents are also likely to be affected by the
potential social risk associated with undertaking greater
financial risk. This proposition stands supported by
Sunden and Surette (1998), who assessed risk tolerance
by choice of pension plan and concluded that marriage,
and therefore an enhanced number of dependents, makes
both men and women less risk tolerant in their choices.
Daly and Wilson (2001) opined that the increased respon-
sibilities accompanying marriage and children will make
a man less tolerant of risk. Hallahan et al. (2004) too
found a significant negative relationship between risk tol-
erance and the marital status of individual investors. For
the purpose of this study, the ratio of earning members
to total number of members in the respondent’s family
(E/T) has been used to reflect the enhanced/diminished
Copyright © 2016 John Wiley & Sons, Ltd.
responsibility bestowed by marital status or number of
dependents. As argued earlier, the authors believe this
variable to be more representative of the pluralistic Indian
culture, wherein the financial responsibilities of the bread-
winner extend beyond the immediate family.
Occupation
Occupation refers to the principal activity in which an
individual engages for pay. McClelland’s theory of person-
ality states that an individual’s choice of occupation
depends on whether they are motivated by achievement,
power, affiliation, or security. Individuals motivated by
achievement choose occupations with relatively higher
economic and political risks (e.g., entrepreneurial ven-
tures). Therefore, self‐employed individuals are likely to
exhibit greater risk tolerance compared with salaried indi-
viduals (MacCrimmon and Wehrung, 1986). Masters
(1989) found that non‐professionals (e.g., clerks, farmers,
laborers) are less risk tolerant compared with professionals
(e.g., educators, doctors, lawyers, businessmen, manag-
ers). Mittal and Vyas (2007) suggested that salaried people
prefer to invest their money in equities and mutual funds;
meanwhile self‐employed people were more inclined to
invest their money in riskier options (e.g., debentures and
real estate).
Income
Malkiel (1996, p. 401) argues that, ‘The risks you can
afford to take depend on your total financial situation,
including the types and sources of your income exclusive
of investment income.’ A higher level of income should
encourage greater risk tolerance, because greater wealth
ensures access to more resources for investment and also
serves as a cushion against the vagaries of the financial
market. Bajlelsmit and VanDerhai (1997) analyzed inves-
tors’ choice of pension plan (with varying degrees of risk)
to find that employees with a high income were willing
to take more risk compared with employees with a low
income. Many other researchers (e.g., Bernheim et al.,
2001; Hallahan et al., 2004; Lee and Hanna, 1991; Riley
Strategic Change
DOI: 10.1002/jsc
 Financial Risk Tolerance among Indian Investors
and Chow, 1992; Schooley and Worden, 1996) have
found a significant positive relationship between income
and risk tolerance.
The present study investigated the simultaneous
impact of the socioeconomic determinants of age, gender,
occupation, income, and E/T, along with the individual
consumption value of materialism.
Materialism
The tendency toward materialism is an inherent constitu-
ent of the human condition (O’Shaughnessy and
O’Shaughnessy, 2002). Over the last two and a half
decades, researchers have exhibited tremendous interest in
the construct of materialism (e.g., Belk, 1984; Burroughs
and Rindfleisch, 2002; Richins and Dawson, 1992).
Belk (1987) defined materialism as ‘the tendency to
believe that consumer goods and services provide the
greatest source of satisfaction and dissatisfaction in life.’
Pollay (1986) defined materialism as ‘the belief that con-
sumption is the route to happiness, meaning, and the
solution to most personal problems.’ The contribution
that revolutionized the way we think about materialism is
that by Richins and Dawson (1992), who conceptualized
materialism as a value. Rokeach (1973) has suggested that
a value is a centrally held, enduring belief which guides
actions and judgments across specific situations and
beyond immediate goals to more ultimate end states of
existence. Richins and Dawson (1992) defined material-
ism as ‘a value that guides people’s choices and conduct
in a variety of situations but not limited to consumption
arenas.’ The construct is based on three ‘orienting values’ –
acquisition centrality, acquisition as the pursuit of hap-
piness, and possession‐defined success. Materialistic
individuals, with position acquisition at the center of their
lives, believe that acquisition provides happiness, and
define their own success as well as the success of others
on the basis of their possessions. An analysis of material-
ism as a value leads one to conclude that it is: (1) a cen-
trally held and enduring belief; (2) aimed for as an end
state of existence; (3) influential beyond immediate goals.
Copyright © 2016 John Wiley & Sons, Ltd.
489
Materialism, as a value, has been widely researched (see
Kamineni, 2005; Wang and Wallendorf, 2006).
This study draws its strength from the definition of
materialism as a value given by Richins and Dawson
(1992), wherein they categorically suggest that the influ-
ence of materialism is aimed for as an end state of exis-
tence and extends beyond the immediate goals of
consumption. The present authors posit that materialistic
individuals, in their quest for greater consumption and
possession, would warrant higher earnings and therefore
display greater financial risk tolerance.
Materialism and risk tolerance
Risk tolerance has often been studied in relation to socio-
economic characteristics. This study broadens the hori-
zons of risk tolerance research by assessing the impact of
the psychological construct of materialism, in addition to
the effect of socioeconomic determinants.
The definition of materialism as a value has enabled
researchers to study the ramifications of materialistic ten-
dencies and comprehend its causal relationship with other
constructs and variables of importance to marketers. This
study investigates the relationship between materialism
and financial risk tolerance. Materialism, for the purpose
of this research, has been treated as an individual value
whose impact extends to the domain of an individual
investor’s risk tolerance.
Materialists give prominence to possessions and the
acquisition of objects in life. This desire to acquire is
expected to cajole individuals toward investments with
greater reward, notwithstanding the risk, thereby enhanc-
ing their risk tolerance. Materialists believe that posses-
sions and their consumption are essential to their
satisfaction (Belk, 1984). It is this belief which not only
influences the ‘type and quantity of goods purchased’ to
attain an end state of existence, but also influences the
‘allocation of variety of resources, including time’ to
achieve an ultimate end state of existence beyond immedi-
ate goals (Richins and Dawson, 1992). This research
determines whether the desire to attain an affluent end
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490 Manit Mishra and Sasmita Mishra
state of existence elevates the materialistic individual
investor to a position of greater financial risk tolerance.
This premise draws sustenance from the findings of
several researchers who have investigated the relationship
between materialism and financial decision‐making.
Richins (2011) suggested that materialism simultaneously
leads to a more favorable attitude toward debt and a stron-
ger belief that life transformations will occur as a result of
acquisitions, and these two forces work together to increase
credit overuse. Watson (2003) investigated the relation-
ship between materialism and spending tendencies, saving,
and debt. His findings showed a negative relationship
between materialism and saving, such that highly materi-
alistic people are more likely to be spenders whereas people
with low levels of materialism are more likely to save
through financial investments such as stocks and mutual
funds. His findings also suggest a strong inclination on the
part of highly materialistic people toward borrowing
money for non‐essential purposes. It establishes the pro-
clivity of materialistic individuals toward earning more
money. More materialistic consumers have been found to
be willing to carry heavier debt loads (Ponchio and Aranha,
2008), and exhibit a more positive attitude toward bor-
rowing (Watson, 1998). Tang et al. (2008) measured stu-
dents’ behavioral intentions, to find that a love of money
was significantly correlated with risk tolerance. Further,
investor risk tolerance is considered to be a psychological
determinant of financial behavior (Jacobs‐Lawson and
Hershey, 2005), and therefore is likely to be influenced by
a hedonic value like materialism.
The present study proposes that individuals with low
levels of materialism would have lower financial risk toler-
ance, whereas highly materialistic individuals have a
strong disposition toward money and hence exhibit greater
financial risk tolerance.
Research summary
There has been plenty of research on the impact of
socioeconomic determinants on financial risk tolerance.
Copyright © 2016 John Wiley & Sons, Ltd.
However, as the literature review suggests, there is a lack
of consensus on the direction of impact for most demo-
graphic determinants. The justification for assessing the
effect of socioeconomic variables on financial risk toler-
ance is due to Samuelson (1969). He listed the four most
common reasons why ‘a young businessman can take
more risk in the financial market than an old widow’ as:
(1) the businessman is more affluent than the widow;
(2) the businessman expects higher earnings in the future;
(3) the businessman can recover any current losses in the
future; and (4) the businessman has a much longer invest-
ment horizon compared with the old widow. In other
words, the businessman has greater risk tolerance by virtue
of his socioeconomic characteristics. At the same time, the
variables are largely intertwined in their effect on risk
tolerance, rather than being isolated. Morin and Suarez
(1983) investigated risk tolerance through an assessment
of investment in risky assets such as stocks, bonds, mutual
funds, real estate (other than owner‐occupied home),
equity in own business, and loans. Their findings integrate
the impact of age and net worth (reflecting financial sta-
bility) on risk tolerance. They suggest that for those having
low net worth, risk tolerance decreases with age whereas
for high net worth, risk tolerance increases with age.
Another study that integrates the impact of socioeconomic
determinants is by McInish et al. (1993), who concluded
that the relationship between net worth and risk tolerance
was statistically significant for individuals aged 35 and
above, but not for those below 35 years of age.
Even as there is evidence to indicate the impact of
materialism on financial decision‐making, there is a dearth
of research on the impact of materialistic tendencies spe-
cifically on financial risk tolerance. An exception in this
regard is the work of Richins (2011), who argued that a
strong desire for wealth, goods, and life transformations
on the part of materialistic individuals has resulted in
financially risky behavior.
This study carries forward the research through
investigation of the contentious issue of the degree and
direction of the simultaneous impact of socioeconomic
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 Financial Risk Tolerance among Indian Investors
determinants and individual consumption values on
financial risk tolerance.
Methodology
Data
The data for the study was generated from employees
working in a higher education institute of some repute in
the city of Bhubaneswar, Odisha, India during the period
October to December 2014. The employees included in the
sample were randomly chosen from a listing of all faculty
and staff. One half of all employees (N = 600) received the
questionnaire, on the basis of a random selection.
The survey instrument used was a self‐administered
questionnaire comprising 37 questions divided across
three sections. The first section sought demographic infor-
mation on the variables of age, gender, marital status,
occupation, number of earning and total family members,
and income. The second section required a response on
risk tolerance using the 13‐item Grable and Lytton
(1999a) scale, whereas the third section assessed the mate-
rialistic tendencies of respondents through the 18‐item
Richins and Dawson (1992) scale of materialistic values.
The response rate for the survey was 95.3 percent, with
286 questionnaires returned. However, six questionnaires
were unusable due to missing values. Therefore, this
resulted in 280 valid responses for this analysis, or a usable
response rate of 93.3 percent (n = 280).
Measurement
The construct ‘risk tolerance’ is the dependent variable in
the study. Roszkowski et al. (1993, p. 230) noted that
when it comes to measurement of risk tolerance, most of
the instruments are operationalized by various financial
planning organizations for in‐house use. This limits their
applicability in a wide variety of situations. Further, Mac-
Crimmon and Wehrung (1986, p. 65) suggest the use of
a questionnaire over any other method of measuring risk
tolerance, since it ensures a response free from decision
Copyright © 2016 John Wiley & Sons, Ltd.
491
analyst influence. Therefore, for this research the authors
used a scale which could capture the multidimensional
nature of the financial risk tolerance construct, with estab-
lished reliability and validity estimations.
Grable and Lytton (1999a) operationalized financial
risk tolerance on the basis of the three dimensions of
investment risk, risk comfort and experience, and specula-
tive risk. The scale consists of 13 items and satisfies the
reliability and validity criteria (Grable and Lytton, 2001).
For the purpose of the present study, the Grable and
Lytton (1999a) scale is used to measure financial risk
tolerance. Materialism and five other socioeconomic vari-
ables were considered as independent variables for the
study. The scale developed by Richins and Dawson (1992)
is more acceptable and applicable to consumers in varied
cultures owing to the sheer diversity and depth of respon-
dent profiles. Therefore, for the present study, the mate-
rialism of individual investors has been measured using
the Richins and Dawson (1992) scale. Responses were also
sought on the five socioeconomic variables of age, gender,
ratio of earning members to total number of members in
the family (E/T), occupation, and family income.
Statistical analysis
Financial risk tolerance cannot be treated as a continuum
on which individuals can be assigned values (Grable and
Lytton, 1998). This study was based on the premise that
financial risk tolerance can be treated as high (above
average) or low (below average). This approach has been
used by several researchers for studying financial risk toler-
ance (Grable and Lytton, 1999b; MacCrimmon and
Wehrung, 1986; Roszkowski et al., 1993). On the basis
of this assumption, multiple discriminant analysis was
used to classify respondents into risk tolerance categories
using respondents’ materialistic values and socioeconomic
characteristics. The study demanded a multivariate analy-
sis so that multicollinearity can be taken care of while
measuring the substantive effect. The assessment of the
impact of materialism on risk tolerance is an important
aspect of the study, and materialism is known to be influenced
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492 Manit Mishra and Sasmita Mishra

by socioeconomic variables – e.g., age (Belk, 1985) and

Table 1. Variable definitions
gender (Kamineni, 2005) – which are also part of the
study. Multiple discriminant analysis as the research Variable Measurement
method has an advantage over multiple regression analysis Risk tolerance 1 = less than or equal to 29
since it can be used for a non‐metric dependent variable, (median value)
2 = greater than 29
in this case financial risk tolerance, and metric indepen- Materialism Respondent’s score on MVS (Richins
dent variables. In other words, it’s a mirror image of the and Dawson, 1992)
Gender 0 = male
method of MANOVA (Hair et al., 2006, p. 300). 1 = female
­Multiple discriminant analysis has a heritage of previ- Age Respondent’s age (21–50)
Marital status 0 = single
ous use in financial risk tolerance research (Grable and 1 = married
Lytton, 1999b). Occupation 0 = staff
1 = faculty
Family income Respondent’s family income per
month in Indian currency
E/T Ratio of number of earning members
Analysis and discussion to total number of members in the
family
Demographic characteristics of the sample
The sample size exceeds the suggested minimum 5:1 ratio
of observations to independent variables and the Materialism
minimum group size of 20 observations (Hair et al., The materialism index scores ranged from a low of 21 to
2006, p. 337). The sample of 280 respondents comprised a high of 77, with a mean of 53.53, a standard deviation
100 women and 180 men. A total of 176 respondents of 10.175, and a median of 54. Respondents’ scores on a
were married and the rest (104) unmarried. The respon- materialism value scale (MVS) were used to generate the
dents who were employed as faculty numbered 172, discriminant function.
whereas 108 were engaged in administrative occupations
but not teaching. The age of respondents ranged from a Stepwise multiple discriminant analysis results
low of 21 to a high of 51. The mean age of respondents The mean and standard deviations of each independent
was 32, with a standard deviation of approximately variable were calculated for the two levels of risk tolerance:
7 years. The overall ratio of earning to total members in above average and below average. The data in Table 2
the family (E/L) was 0.505, with a standard deviation of gives the different values of each independent variable for
0.225. The average monthly family income for the the two groups, and the statistical significance of the dif-
respondents was 67,500 INR. ference. There is a significant difference in the materialism
scores of the two groups, such that respondents having
Risk tolerance greater materialistic tendencies exhibit above‐average risk
The risk tolerance score for the respondents had a low of tolerance in their financial decision‐making (p < 0.05).
17 and a high of 40. The mean value was 29, with a The difference between the above‐average and below‐
standard deviation of 4.812 and a median value of 29. average risk tolerance groups for the variables of age and
The construct risk tolerance was measured dichotomously, gender are marginally significant, at the 5 percent level.
wherein respondents obtaining a score up to the median However, for the variables of occupation, ratio of earning
value of 29 were categorized as 1 and those securing more members to total members in a family (E/T), and family
than 29 were categorized as 2 (see Table 1). income, the analysis could not find the difference to be

Copyright © 2016 John Wiley & Sons, Ltd. Strategic Change

DOI: 10.1002/jsc
 Financial Risk Tolerance among Indian Investors 493

Table 2. Group means and standard deviations of classifying variables

Variable Below‐average risk tolerance Above‐average risk tolerance Wilks’ lambda F Sig.

Mean SD Mean SD

Materialism 51.2750 9.72174 56.5333 10.14289 0.934 4.833 0.031

Age 33.1500 8.19490 29.8333 5.60224 0.949 3.633 0.061
Gender 0.4500 0.50383 0.2333 0.43018 0.950 3.585 0.063
Occupation 0.6750 0.47434 0.5333 0.50742 0.979 1.440 0.234
E/T 0.4862 0.18369 0.5303 0.27340 0.991 0.650 0.423
Family income 71634 41176.9 62033 40186.9 0.986 0.951 0.333

statistically significant. Gender being a dichotomous vari-
able (0 for males and 1 for females), the mean value
indicates the proportion of cases with a value of 1 (i.e.,
number of females). Therefore, while the above‐average
risk tolerance group comprises 23.33 percent women and
76.67 percent men, the below‐average risk tolerance
group consists of 45 percent women and 55 percent men.
Similarly, faculty members comprise 53.33 percent of the
above‐average risk tolerance group and 67.5 percent of
the below‐average risk tolerance group. The average age
for the above‐average risk tolerance group is approxi-
mately 30 years, whereas for the below‐average risk
tolerance group the average age is approximately
­ rialism, gender, and age were the most different for above‐
33 years. Interestingly, the average family income of the
above‐average risk tolerance group (62,022 INR p.m.) is
less than the average family income of the below‐average
risk tolerance group (71,634 INR p.m.). The ratio of
earning members to total members is higher in the above‐
average risk tolerance group (0.5303) in comparison with
the below‐average risk tolerance group (0.4862). The sta-
tistical significance of the independent variables in dif-
ferentiating between the two levels of risk tolerance was
determined using one‐way ANOVA. The univariate F and
Wilks’ lambda values represent the separate or univariate
effect of each variable, not considering the multicollinear-
ity among the independent variables. The F‐statistic
results given in Table 2 indicate that only materialism,
gender, and age could successfully discriminate between
the two levels of risk tolerance. In contrast, occupation,
ratio of earning to total members in the family (E/T), and
family income failed to discriminate in a statistically sig-
nificant manner between the levels of risk tolerance. The
findings are corroborated by Wilks’ lambda figures for
each of the independent variables.
Wilks’ lambda is defined as the ratio of the within‐
group sum of squares to the total sum of squares. A small
value of lambda indicates a large difference between
group means. The smallest Wilks’ lambda value is that for
materialism, thereby suggesting its univariate ability to
discriminate between the two levels of risk tolerance.
Thus, as given in Table 2, the mean responses for mate-
average and below‐average risk tolerance groups.
Meanwhile, the variables of occupation, E/T, and family
income – when considered in terms of their isolated
impact – failed to discriminate significantly between the
two groups of risk tolerance. This analysis is not free from
the impact of multicollinearity among independent vari-
ables. In order to determine the discriminant variate that
will discriminate best between the above‐average and
below‐average risk tolerance groups, the appropriate
linear combination of independent variables under inves-
tigation needs to be identified. Toward this objective,
multiple discriminant analysis has been used in the
present study.
Prior to conducting discriminant analysis on the data,
it was tested for meeting the assumption of equal variance–
covariance matrices across groups. Box’s M test was used

Copyright © 2016 John Wiley & Sons, Ltd. Strategic Change

DOI: 10.1002/jsc
494 Manit Mishra and Sasmita Mishra
to assess the similarity of the dispersion matrices of the
independent variables among the groups. The analysis
failed to reject the null hypothesis that the dispersion
matrices are homogeneous (Box’s M = 16.9, approximate
F = 1.6, p = 0.106), thereby meeting the stringent condi-
tion for being subject to discriminant analysis. A stepwise‐
discriminant analysis was considered appropriate to meet
the objectives of the research, since the purpose of this
research was to identify the variables which can success-
fully differentiate between the above‐average and below‐
average risk tolerance groups.
The second stage of analysis comprised an evaluation
of the discriminant loadings or structure correlations
given in Table 3. The authors do not emphasize the dis-
criminant weights and the resulting discriminant func-
tion equation, since the objective is to identify the
independent variables that have a strong relationship with
group membership in the categories of the dependent
variable of risk tolerance rather than building a predictive
model. The discriminant loadings measure the simple
linear correlation between each independent variable and
the discriminant function, thereby reflecting the variance
that a particular independent variable shares with the
discriminant function. Thus, these loadings indicate the
discriminating power of each independent variable,
taking into consideration the interaction between and
among the independent variables. The importance of
the variables in the discriminant function is indicated
Table 3. Pooled within‐group correlations between independent
variables and the standardized canonical discriminant
function
Variable Risk tolerance coefficient
Materialism 0.513
Age 0.445
Gender 0.442
Occupation* 0.294
E/T 0.188
Family income* 0.103
*
Variable not used in the final discriminant function.
Copyright © 2016 John Wiley & Sons, Ltd.
by the relative size of the absolute value of the coefficient.
The more important variables have larger coefficients.
Hair et al. (2006, p. 331) suggest that variables exhibiting
an absolute loading of 0.40 or higher may be considered
substantive. The variable that shared most variation with
the canonical discriminant function was materialism
(coefficient of 0.513), followed by age (coefficient of
0.445) and gender (coefficient of 0.442). Occupation,
ratio of earning members to total members in the family
(E/T), and family income possess comparatively less dif-
ferentiating power between different levels of risk toler-
ance. Hence, the loadings tend to suggest that materialism
has maximum power to discriminate between above‐
average and below‐average risk tolerance groups, followed
by age and gender, respectively.
The stepwise multiple discriminant analysis included
the variables of materialism, age, gender, and E/T in the
discriminant function. The discriminant function is highly
significant (p = 0.003) and displays a canonical correlation
of 0.461 (p < 0.01). The canonical correlation value sug-
gests that approximately 21 percent (0.4612) of the vari-
ance in risk tolerance is accounted for by this model,
which includes four independent variables. A high canon-
ical correlation indicates a function that discriminates well
between different groups. This finding stands substanti-
ated by Wilks’ lambda value. The value of Wilks’ lambda
for this discriminant function was 0.787 (p < 0.01). Thus,
the discriminant function explained 21.3 percent of the
variance in the financial risk tolerance scores within the
sample. The stepwise discriminant analysis was able to
identify a set of variables – namely materialism, age,
gender, and E/T – that can provide a rather succinct and
powerful distinction between the above‐average and
below‐average risk tolerance groups. The Wilks’ lambda
and univariate F‐statistic values given in Table 2 suggest
the ability of materialism, age, and gender to discriminate
among the groups, but only separately. However, the
parameters depicting the overall model fit in Table 4
suggest a discriminant function comprising materialism,
age, gender, and E/T that takes into consideration
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DOI: 10.1002/jsc
 Financial Risk Tolerance among Indian Investors
Table 4. Overall model fit – canonical discriminant functions
Eigenvalue Canonical correlation Wilks’ lambda
0.270 0.461 0.787
multicollinearity among the various independent variables
and simultaneously maximizes the between‐group vari-
ance relative to the within‐group variance.
This is reflected in the inclusion of E/T in the dis-
criminant function. The variable E/T did not have a sig-
nificant discriminating effect when considered separately,
but had enough unique variance to be part of the discrimi-
nant function eventually. The analysis suggests that col-
lectively, the combination of variables materialism, age,
gender, and E/T has a statistically significant strong rela-
tionship with the group membership of respondents in
the above‐average and below‐average risk tolerance groups.
Thus, the discriminant variate that successfully isolates the
above‐average risk tolerance groups from the below‐
average risk tolerance groups comprises materialism, age,
gender, and E/T.
Predicting financial risk tolerance
The overall model is statistically significant and explains
21 percent of the variation between the above‐average and
below‐average risk tolerance groups. Therefore, an assess-
ment of the predictive accuracy was made. The discrimi-
nant score obtained for each respondent was used to
classify each respondent into above‐average or below‐
Table 5. Classification results
Risk tolerance Actual group Predicted group
Above average
Number
Above average 30 21
Below average 40 11
Copyright © 2016 John Wiley & Sons, Ltd.
495
Chi‐square Sig.
15.778 0.003
average risk tolerance categories. As shown in Table 5,
out of 120 respondents in the above‐average risk tolerance
category, the model was able to correctly classify 84
(i.e., 70 percent). Similarly, out of 160 respondents in the
below‐average risk tolerance category, 116 were correctly
classified (i.e., 72.5 percent). Overall, the discrimi-
nant function – including the independent variables of
materialism, gender, age, and ratio of earning to total
members in the family – correctly classified 200 out of
280 respondents. This pertains to 71.4 percent accuracy
on the part of the derived model (p < 0.05).
Conclusion
A concurrent assessment of the means for the independent
variables included in the discriminant function (given in
Table 2) and their respective discriminant loadings (given
in Table 3) was done to determine the pattern of relation-
ships between the risk tolerance groups and the indepen-
dent variables of materialism, age, gender, and E/T. The
variable which contributed most to explaining the differ-
ence between levels of risk tolerance is materialism. The
analysis suggests that respondents high on materialism
tend to exhibit above‐average risk tolerance. This is a rev-
Below average
Percentage Number Percentage
70.0 9 30.0
27.5 29 72.5
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DOI: 10.1002/jsc
496 Manit Mishra and Sasmita Mishra
elation. Even though the impact of materialism on various
financial decisions (e.g., savings and investments) has been
investigated in the past, the specific effect of materialism
on financial risk tolerance – which subsequently influences
saving and investment decisions – has never been explored.
With regard to the independent variable of age, the con-
ventional wisdom that risk tolerance reduces with increas-
ing age, withstands our scrutiny. A greater number of men
in the sample demonstrated above‐average risk tolerance,
whereas a greater number of women belonged to the
below‐average risk tolerance group. Therefore, our find-
ings regarding the impact of gender on financial risk toler-
ance tend to agree with past research, wherein men have
shown greater financial risk tolerance compared with
women. The inclusion of the independent variable of E/T
was meant to cater specifically for the Indian culture. An
earning member in India not only has responsibility
toward their immediate family – comprising their spouse
and children – but also toward their parents and even the
extended family, comprising relatives. Therefore, this vari-
able is likely to have a greater impact on risk tolerance
compared with any other independent variable represent-
ing family burden (e.g., marital status). Independently,
though, E/T did not have a statistically significant contri-
bution to risk tolerance.
Overall, the analysis discovered a discriminant func-
tion comprising materialism, age, gender, and E/T, which
collectively act as a good discriminator of risk tolerance
levels. The discriminant function accounted for approxi-
mately 21 percent of the variance between risk tolerance
groups. In other words, financial risk tolerance, as a con-
struct, could best be described by a linear combination of
respondents’ materialistic tendencies, age, gender, and
ratio of earning to total members in the family. Therefore,
it was concluded that above‐average risk tolerance is asso-
ciated with a higher level of materialism, lower age, male
gender, and higher ratio of earning to total members in
the family. Occupation and family income explained a
comparatively smaller percentage of the variation in finan-
cial risk tolerance. The analysis based on the values of
Copyright © 2016 John Wiley & Sons, Ltd.
Wilks’ lambda and canonical correlation led to the con-
clusion that the linear combination of variables worked
to separate the two levels of risk tolerance from each other.
On the whole, materialism emerged as the best dis-
criminating factor between above‐average and below‐
average risk tolerance. The association of materialism with
various socioeconomic (e.g., age, gender, and E/T) vari-
ables is well established. Materialism has also been studied
extensively in the consumer behavior literature in terms
of its impact as an independent variable on various con-
structs (e.g., innovativeness, attitude toward advertising).
This study broadens the horizons of research on material-
ism by discovering its hitherto unexplored relationship
with the construct of financial risk tolerance.
In addition to establishing the relationship of materi-
alism with risk tolerance, another significant finding of
this study is the role of family responsibility in influencing
risk tolerance levels, in collaboration with other variables.
The ratio E/T is not able to influence financial risk toler-
ance as a separate variable. However, in association with
materialism, age, and gender, it determines the level of
risk tolerance as part of a variate.
Thus, the seminal findings of this study are: (a) the
discriminant function comprising materialism, age, gender,
and ratio of earning to total members in a family (E/T) as
a variate discriminates significantly the above‐average level
of financial risk tolerance from the below‐average level of
financial risk tolerance; (b) the above‐average financial risk
tolerance group demonstrates significantly greater material-
istic tendencies compared with the below‐average risk toler-
ance group; and (c) the ratio of earning to total members
in the family (E/T) explains enough unique variance
between risk tolerance groups so as to discriminate between
above‐average and below‐average financial risk tolerance
groups, in association with materialism, age, and gender.
Implications
Financial service providers, financial investment planners,
and other practitioners have to assess individual financial
Strategic Change
DOI: 10.1002/jsc
 Financial Risk Tolerance among Indian Investors
risk tolerance. Mostly, these practitioners depend on uni-
dimensional evaluations, objective heuristics, and intui-
tive subjective judgments to understand financial beliefs,
pecuniary needs, and hedonic aspirations that shape
financial risk tolerance. Such a piecemeal approach does
not do justice to the complicated psychological construct
of financial risk tolerance. This article broadens the hori-
zons of assessment of risk tolerance by taking into consid-
eration the personality trait of materialism as well as
offering a combination of variables (including psychologi-
cal and socioeconomic particulars) that effectively segre-
gate investors into above‐average and below‐average risk
tolerance. An appropriate assessment would enable prac-
titioners to customize their product mix to suit the finan-
cial temperament of investors, while simultaneously
fulfilling their financial objectives to an optimum extent.
The variate obtained in the present study would enable a
marketer to correctly identify the financial risk tolerance
based on materialism, age, gender, and E/T ratio
71.4 percent of the time. The high degree of accuracy
should provide confidence in the development of a strat-
egy based on these results. The study identified isolated
variables and a variate as effective risk tolerance differen-
tiating factors. The findings reinforce the notion that the
age and gender of respondents significantly influence their
financial risk tolerance perceptions. Men tend to be more
tolerant toward risk compared with women, and risk tol-
erance reduces with increased age. Practitioners, therefore,
can continue to rely on age and gender to classify pros-
pects into above‐average or below‐average risk tolerance
groups. At the same time, practitioners must note that age
and gender, when combined with materialistic tendencies
and E/T ratio, influence an individual’s risk tolerance. A
young materialistic male with fewer mouths to feed would
exhibit substantially greater financial risk tolerance com-
pared with an aged spiritual female with great fiscal
responsibility toward the family. These are two cases at
opposite ends of the spectrum, but nevertheless they aid
in the portrayal and subsequent discrimination of a
financially risk‐tolerant investor from a non‐risk‐tolerant
Copyright © 2016 John Wiley & Sons, Ltd.
497
investor. The identification of materialism as a key variable
discriminating between risk tolerance levels has key impli-
cations for practitioners. The assessment of this personal-
ity trait at the level of an individual investor may be
difficult, due to its psychological nature compared with
inferring some of the socioeconomic attributes of a pro-
spective investor. This, however, does not in any way
diminish the importance of the finding that materialistic
tendencies make individuals more risk tolerant. Societies
across the world are gradually moving toward greater
materialism. Financial planners and other practitioners
can assess the materialistic values of the target market as
a whole and thereafter, deduce the financial risk tolerance.
This article makes an important contribution to the inves-
tor behavior literature by taking into account both subjec-
tive and objective characteristics while assessing a person’s
financial risk tolerance. It is an improvement on the
assessment of risk tolerance based on investor profiling
using individual socioeconomic variables separately. A
linear combination of materialism, age, gender, and E/T
offers optimum discrimination between above‐average
and below‐average financial risk tolerance groups. Inves-
tor profiling on the basis of the variate derived would
provide an improved assessment of risk tolerance and,
thereby, contribute toward ameliorated financial well‐
being of individuals and families. Notwithstanding the
statistical and practical significance of the findings in the
present study, the fact that the variate obtained explains a
little more than 21 percent of the variance between the
risk tolerance levels should encourage researchers to
examine other psychological, psychographic, and demo-
graphic variables that could possibly add to the variance
accounted for. A greater understanding of the financial
risk tolerance construct and the variables shaping it would
enable superior personal financial management by practi-
tioners, researchers, and investors.
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500 Manit Mishra and Sasmita Mishra

BIOGRAPHICAL NOTES

Manit Mishra is Associate Professor of Marketing
and Quantitative Techniques at the International
Management Institute, Bhubaneswar, Odisha, India.
His teaching expertise includes marketing research,
business analytics, and consumer behavior. His areas
of research interest are hedonic consumption
behavior, statistical modeling, marketing instrument
validation, and multivariate consumer behavior
analysis.
Sasmita Mishra is Assistant Professor of Finance
and Accounting in the Department of Business
Management, CV Raman College of Engineering,
Bhubaneswar, Odisha, India. Her teaching expertise
includes financial accounting and financial services.
She is currently pursuing a Ph.D. in the area of
behavioral finance at Centurion University of
Technology and Management, India.

Correspondence to:
Manit Mishra
International Management Institute
IDCO Plot No. 1, Gothapatna
Bhubaneswar – 751003
Odisha, India
email: manit.mishra@imibh.edu.in;
manitmishra@rediff.com

Copyright © 2016 John Wiley & Sons, Ltd. Strategic Change

DOI: 10.1002/jsc

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