A Domain Specific Measure of Investment Risk Preference

Abstract

This study introduces and validates a domain-specific investment risk-preference measure that integrates elements of revealed-preference tests, using choice scenario dyads, with stated-preference approaches that leverage individual experiences and perceptions. Data from two surveys were analyzed using OLS regression and ordered logit models to evaluate the measure’s efficacy. Results demonstrate that the proposed measure is positively associated with a modified version of the Survey of Consumer Finances (SCF) self-assessed risk-tolerance item and negatively associated with cash-holding behavior. Compared to existing risk-tolerance assessments, this measure offers a practical advantage by allowing financial advisors to align investment products more accurately with a test-taker’s risk-taking comfort level. This direct applicability highlights the measure's unique value in enhancing portfolio personalization and advancing the precision of investment risk assessment tools.