Subjective and Objective Financial Knowledge and Their Associations with Financial Risk Tolerance

This article examines the relationship between the financial risk-taking behavior of individual investors and their subjective and objective knowledge. The data come from multiple waves of surveys conducted by the National Financial Capability Study between 2009 and 2018. We hypothesize that subjective knowledge will have a greater association with risk tolerance than objective knowledge of individual investors. Regression models are estimated with least squares as well as with the ordered logit method. Estimation results show that individual investors' risk tolerance behavior is associated more with their subjective knowledge than their objective knowledge. This is true in all four surveys separately and in the combined sample. Additionally, as hypothesized, the relative influence of subjective knowledge on risk tolerance, compared to objective knowledge, increases as the survey periods move further away from the financial recession of 2007-2008. This article has important implications for behavioral and personal finance researchers, financial advisors, and regulators.