THE INFLUENCE OF FINANCIAL BEHAVIOUR ON FINANCIAL
RISK TOLERANCE IN INVESTMENT DECISION: A
CONCEPTUAL PAPER
INTRODUCTION
Financial behaviour is the result of financial knowledge and self-confidence (Ramalho & Forte, 2019). Tang and
Baker (2016) suggested that psychological traits such as self-esteem have an important role in explaining differences in
financial behaviours. Based on results from a nationally representative dataset of United States adults, the study argued
that self-esteem significantly impacts financial behaviour both directly and indirectly through subjective financial
knowledge after controlling for financial knowledge and other socioeconomic factors.
On the other hand, financial risk tolerance (FRT) can be explained by the amount of risk a person is willing to take
when making a financial decision or investment (Ferreira & Dickason, 2018). A study by Bannier and Neubert (2016)
stated that higher risk tolerance relates positively to both standard and sophisticated investments for men, but only to
standard investments for women. However, there is no relationship found between risk tolerance and women’s
sophisticated investments.
In order to increase FRT, previous studies on FRT had focused on the factors that affect FRT levels within financial
practices. However, there is scarce conceptual and theoretical knowledge in financial studies discussing the influence of
financial behaviour on FRT in investment decisions. In order to fill the gap, this paper proposes a theoretical framework
to describe the influence of financial behaviour on FRT in investment decisions in Malaysian market.
In this study, there is an underpinning theory that explains financial behaviour and its relation with FRT in
investment decisions. According to the theory of planned behaviour (TPB), behavioural decisions are the outcome of the
reasoning process in which the behaviour is influenced by norms, attitudes, and perceived control behaviour (Sommer,
2011). This theory has been practised in a wide range of behavioural fields in order to have a better understanding of
how individuals behave the way they do. Sommer (2011) also describes this theory as one of the best-supported social
psychological theories to predict human behaviour. In this proposed conceptual study, financial behaviour is examined
to explain its connection to individuals’ FRT in investment decision-making.
From this study, investment firms will benefit from the insights provided on ways to avoid behavioural biases in
making decisions for investments, then deal with risk in investment. This is due to the various challenges in the
investment industry to be encountered in order to enhance high-quality financial performance and business outcomes,
such as job opportunities and economic growth (Gold & Taib, 2020; Wang et al., 2020; Al-sakkaf et al., 2020). In this
study, FRT is examined as the possible product of financial behaviour in investment decision-making.
LITERATURE REVIEW
This study conducted a review of previous studies on subjects regarding financial behavior and FRT, especially in
investment products. The findings are as follows.
Financial behaviour
Financial behaviour aspect can be determined by several indicators. For example, Paisarn et. al (2021) indicated
that demographic factors such as gender, years of experience in trading, age, and income play their roles in shaping
trading behaviour amongst stock market investors. Whereas, Kaiser and Menkhoff (2017) argued that financial
education is found to significantly explain financial behaviour amongst individuals. However, this variable was found
to be less effective for low-income and low-middle income economies. Specifically, behaviour like debt handling is
poorly incharged that financial education should be introduced formally as early as possible. This is because
individuals from low-income and low-middle income households do not possess higher education. Therefore, basic
financial education together with basic mathematical ability should be introduced in higher primary or lower secondary
education. That is when children are between 10 to 15 years of age.
The effects of financial behaviour
On the other hand, there are several studies investigating the effects of financial behaviour around the globe. For
instance, financial behaviour is believed to give an impact on financial well-being and financial market participation. In
line with the growing issues in financial management amongst youths, Lajuni et. al (2017) studied financial distress
amongst the age group. The study stated that financial behaviour and the role of educators give an impact on personal
financial distress amongst undergraduate students in Sabah Territory, Malaysia. Financial mismanagement is believed
to be responsible for alarming bankruptcy amongst youths where a study reported that on average 11 youths are
declared bankrupt every day in the country.
, The study believes that children spend more time in schools and higher education institutions than family after they
started primary school. In other words, teachers and lecturers play roles as parents from the moment children started
their school period until they graduate high school or higher education, and then start working, where their financial
management ability should be already taken place. Therefore, the education system should transform from the
traditional belief that parents should crystalise their children’s financial management ability to educators’ roles,
considering the long time children spend in schools and higher education as compared to with their families.
Meanwhile, Lajuni et al. (2018) added that behavioural traits have a stronger impact on personal financial distress than
religiosity and financial knowledge amongst the Malaysian millennial generation.
Financial risk tolerance
In addition, financial risk tolerance is believed to be an important determinant in shaping consumers’ financial
decisions (Grable, 2016). According to Stanley and Chok (2017), effective financial decisions and financial planning are
crucial in achieving financial independence, especially for education planning, insurance needs, and long-term
retirement planning for working married couples with children, since pension funds currently are found to be inadequate
for most people.
Therefore, Mankuroane (2021) argued that FRT is the measurement usually considered by financial institutions
when profiling the investors’ intentions towards short-term and long-term investments. Findings from the study suggest
that risk tolerance plays a role in predicting investors’ intentions to invest in short-term and long-term investments in
South Africa.
Besides risk tolerance, investors’ intentions towards an investment are also supported by further consideration of
companies’ financial ratio information on liquidity, leverage, profitability, performance of the company, and the
dividend payout ratio (Kazemian et. al, 2017; Seng & Thaker, 2018; Nguyen, 2019). From this information, investors
will have some calculations on how much return they can expect from their investment, and decide whether to invest or
otherwise. Furthermore, according to Yakubu (2021) and Hussain et al. (2020), dividend policy is significant in
investment decisions and has a crucial role in determining a company’s survival in business competition as one of the
ways to attract investors to have a shareholding in the company. Therefore, a company should improve its financial
performance to overcome the competition.
Factors influencing financial risk tolerance
In addition, there are also several studies conducted previously to examine the factors that give an impact on FRT.
For example, Irandoust (2017) stated that portfolio structure, financial literacy, educational attainment, income,
financial stability, age, gender, marital status, and family size give an impact on FRT amongst Swedish. Meanwhile, in
Pakistan, Shah et. al (2020) investigated the same indicators. The study examined whether demographic factors, namely
age, gender, education, occupation, experience, income, location, and saving determine individuals’ FRT. The study
showed that individuals with higher income, higher savings, higher education level, and older age have higher FRT. In
addition, geographical difference is also found to explain different levels of FRT amongst respondents in Pakistan.
In terms of geographical difference, investment firms should consider relocating branches to urban areas as the
residents there are more risk-tolerant to take part in investment programs. This step is taken into account to ensure
service efficiency. As for rural area residents, investment firms should consider educational programs to increase their
investment knowledge and improve their risk tolerance level.
In this regard, Beer and Wellman (2021) assessed the impact of perceived stigmatisation and salience of
discrimination on FRT amongst gay men. Findings from the assessment show that higher FRT is associated with
individuals with anticipated stigmatisation, after being exposed to information about bias against their community. The
conclusion from the study can provide some insights towards further investigations involving socially stigmatised,
discriminated, and minority groups of a country.
Meanwhile, Fan et al. (2020) investigated demographical significance in risk tolerance in the United States. The
study examined the roles of gender, political affiliation lines, and income in differences in risk tolerance, constraints,
beliefs, and behaviours amongst adults during the Covid-19 pandemic. Consistent with most previous studies, the study
indicates gaps in risk tolerance between men and women. Men are found to be more risk-tolerant because most of them
are the breadwinner of their families and earn more than women. In addition, Mankuroane (2021) emphasised that
demographic factors play roles in impacting the level of risk tolerance that investors are willing to accept, which will
also determine their life satisfaction.
On the other hand, a study by Khan (2017) proved that investors and employed individuals that are male, having
matriculation or O-level education, expecting an inheritance, transfer of asset or both, together with personality traits
such as achievement, vigilance, positive and negative emotions in an uncertain environment, explain FRT significantly.
In addition, risk tolerance is also explained significantly by cultural dimensions, for instance, femininity and uncertainty
avoidance. Meanwhile, FRT is found to not be explained by future outlook. Pinjisakikool (2018) explored the big five
personality traits as the factors that explain differences in FRT amongst households in Netherland. The study found that
all the big five personality traits namely extraversion, agreeableness, conscientiousness, emotional stability, and intellect
significantly predict FRT. These studies by Khan (2017) and Pinjisakikool (2018) on personality traits agree with the
finding by Rabbani et. al (2020) that personality traits affect one’s overconfidence, then their FRT. According to the
study, men are more overconfident than women. This explains their higher level of FRT, besides earning more money.