An Estimate of the Reliability of the Survey of Consumer Finances Risk-Tolerance Question

This manuscript has not been previously published in any form. Question Summary. The reliability of the Survey of Consumer Finances risk-tolerance question has not been reported in the literature. However, given the importance of reliability as a necessary condition for validity there is a need to know and report the question's reliability estimate. The purpose of this paper is to provide such an estimate. Several approaches were used to estimate the reliability of the question. Estimates of reliability ranged from a low of .07 to a high of .78. Although no precise reliability figure emerged from the analyses, results suggest that the reliability of the item most likely falls in the range of .52 to .59, with .59 being the most likely estimate of reliability. The impact of a person's willingness to engage in financial behaviors in which there can be definite negative outcomes is a topic that has interested researchers working in the consumer and personal finance fields for decades. Over the past ten years, for instance, financial risk tolerance has been studied as a factor influencing household debt invest for retirement (Cavanagh & Sharpe, 2002), to name just a few topics that relate to how willing individuals are to take financial risk. Among family and consumer economists and personal finance researchers one question continues to be widely used to assess the willingness of individuals to take financial risks. That one item is known as the Survey of Consumer Finances (SCF) risk-tolerance question. The question is shown below: Which of the following statements on this page comes closest to the amount of financial risk that you are willing to take when you save or make investments? 1. Take substantial financial risk expecting to earn substantial returns. 2. Take above average financial risks expecting to earn above average returns. 3. Take average financial risks expecting to earn average returns. 4. Not willing to take any financial risks. The popularity of this item among researchers is based on several factors. First, the item is one of the only risk-tolerance questions asked in national surveys of consumers. As such, responses can be used to gauge the general risk-taking preferences of Americans, whereas many other surveys that ask risk questions are limited in generalizability to the U.S. population. Second, the wide use of the item has generally been recognized as a SCF Risk Tolerance Reliability 3 measure offering a high degree of face …