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

The reliability of the Survey of Consumer Finances risk-tolerance question has not been reported in th e li erature. However, given the importance of reliability as a n ecessary condition for validity there is a need to kn w 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. E stimates 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 b eing the most likely estimate of reliability. Among family and consumer economists and personal f i nce researchers one question continues to be widely used to assess the willingness of individual s to take financial risks. That one item is general ly known as the Survey of Consumer Finances (SCF) risk-tolerance qu estion. The question is shown below: Which of the following statements on this page come s 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 s ubstantial returns. 2. Take above average financial risks expecting to ear n above average returns. 3. Take average financial risks expecting to earn aver age eturns. 4. Not willing to take any financial risks. The popularity of this item among researchers is ba sed on several factors. First, the item is one of t he only risk-tolerance questions asked in national surveys of consumers. As such, responses can be used to gau ge the general risk-taking preferences of Americans, whereas many other surveys that ask risk questions are limited i n generalizability to the U.S. population. Second, th e wide use of the item has generally been recognize d as a measure offering a high degree of face validity. The majori ty of researchers using the item continue to do so as uming the question is a reliable substitute for longer more v alid risk scales. Finally, the item continues to be us d because there are few other choices available for those who want to assess risk tolerance with a national finance da tabase. Data were obtained from a convenience sample of fac ulty and staff at a large southeastern state univer sity using a survey methodology. The survey response rat e w s 54%. The sample (N = 1,075) was over-weighted with women (55%), non-Hispanic Whites (90%), and those t hat were married (72%). Household incomes ranged fr om a low of $20,000 to over $90,000 per year. The mean a ge of respondents was 43 years. During the survey process respondents were asked t o answer a series of risk-tolerance assessment questions, including those used by Grable and Lytto n (1999) in their 13-item risk-tolerance summated s cale. The mean risk score for respondents in this study on th e 13-item scale was 25.43, with a standard deviatio n of 5.31. Scores ranged from a low of 13 to a high of 44. Low scores were interpreted to mean a low level of ris k tolerance, and vice-a-versa. The scale is generally considered to offer researchers a reasonable level of validit y and reliability. Based on responses from those in the sample, the Cr onbach’s alpha (i.e., a measure of reliability) was determined to be . 75. This corresponds to reported alphas ranging from . 70 to . 85 in other studies. As part of the survey process respondents were als o asked to answer the SCF risk-tolerance question. The range of responses was as follows: a. 4% “willing to take substantial financial risk expe cting to earn substantial returns. ” [Coded 4] b. 22% “willing to take above average financial risks expecting to earn above average returns. ” [Coded 3] c. 56% “willing to take average financial risks expect ing to earn average returns. ” [Coded 2] d. 18% “not willing to take any financial risks. ” [Cod e 1] The mean score was 2.11, with a standard deviation of . 73. The distribution of answers was different f rom what is typically noted in the Survey of Consumer Finances, but similar to what others have found when assessi ng professional audiences. Overall, fewer respondents answered that they were not willing to take any fin ancial risks compared to what has been reported in the literatur e when the item is used nationally. Responses to th e SCF risktolerance question were correlated with the 13-item risk scale. A correlation of . 54 ( p < .001) was noted.