Influence of Financial Risk Tolerance on Investment Decision-making: A Conceptual Analysis and Future Research Agenda

Abstract

Although extensive research has been conducted on financial risk tolerance and investment decision-making, there is a lack of consensus in the literature regarding the conceptualization of the role of financial risk tolerance in investment decision-making. This inconsistency underscores the need for a conceptual study that elucidates these concepts to make future research consistent and applicable. Therefore, this study sought to fill this gap by conceptually analyzing the influence of financial risk tolerance on investment decision-making. Specifically, the paper explored the determinants of financial risk tolerance, such as personality type, sensation seeking, and self-efficacy. Through a conceptual model, we proposed that sub-variables of financial risk tolerance —personality type, sensation seeking, and self-efficacy—positively influence investment decision-making. The study recommended that financial risk tolerance assessment should precede investment decisions to reduce an individual’s vulnerability to making suboptimal investment decisions that may lead to financial loss.