Effects of culture and language on financial risk tolerance across age :risk perception and risk attitude as underlying mechanism

Abstract

The examination of factors influencing individual financial risk tolerance (FRT) has been heavily researched in the literature because of the importance of effectively assessing an individual’s risk-taking behaviour. Noticeably in recent years, FRT is no longer examined exclusively, yet an increasing attention has also been paid to risk perception (RP) and risk attitude (RAtt). These two constructs are examined as potential mechanisms through which differences in FRT occur. It is argued that an acknowledgement of the underlying process of one’s FRT formation can be used not only for predictive purposes but also for altering one’s risk tolerance level. This study contributes to the body of knowledge by extending insights into two important determinants of FRT, namely, age and culture, as well as investigating the language one speaks as its new determinant. In addition to the consideration of these determinants of FRT, an examination of the underlying mechanisms (RP and RAtt) through which they operate is subsequently conducted. The study employs survey responses of 1,889 respondents from five different cultural and linguistic milieus: the US, the UK, Singapore, China and Vietnam. The evidence suggests that older individuals are less risk tolerant than younger individuals (lower FRT), not because they are more risk averse (similar RAtt), but mainly because they perceive the same investment as riskier (higher RP). Intriguingly, age does not only affect FRT directly, but also significantly influences the effect of culture on FRT. Particularly, although more collectivistic individuals are more risk tolerant than their individualistic counterparts, the increased level of FRT declines with age. However, this moderating effect of age does not operate through either RP or RAtt. Lastly, the study found that language influences one’s FRT. Particularly, individuals speaking weak-future languages, such as Chinese, exhibit higher level of risk tolerance when compared to individuals speaking strong-future languages, such as English and Vietnamese. Additionally, the cross-linguistic difference in FRT is found to operate mainly through the cross-linguistic difference in RP but not RAtt. Overall, the study obtained a consistent finding with the majority of preceding studies supporting that individual risk attitude (RAtt) is a stable personality trait, which is constant across individuals and is not influenced by external factors.