Generational Differences, Risk Tolerance, and Ownership of Financial Securities: Evidence from the United States

Abstract

This paper examines the relationship between generational differences, risk tolerance, and attitudes towards financial investments in a nationally representative sample from the United States of America. The sample consists of pooled cross-sectional data of three waves (2012–2018) and 80,000 observations from the National Financial Capability Study (NFCS). Using a probit model (with and without sample selection), all of the predictor variables are estimated to have statistically significant effects on the ownership of financial securities, with the expected sign effects. There is clearly a generational cohort effect, whereby Baby Boomers are on average more likely to own financial investments than Millennials, controlling for other factors such as incomes, education, and financial literacy. Generation Xers are statistically less likely to have investments in financial securities compared to Millennials. In general, Baby Boomers are more risk-averse and Generation Xers are more risk-loving than Millennials, accounting for education and income levels. The paper reveals a conundrum in which Baby Boomers (Gen Xers), although more (less) risk-averse, are more (less) likely to own financial securities. We control for reverse causality (endogeneity) in the relationship between risk tolerance and the ownership of securities, using the bivariate probit model. The level of financial knowledge of respondents correlates highly with asset ownership: individuals with high and medium levels of financial knowledge are more likely to own financial assets than those with low levels of financial knowledge. To address the limitations of the current findings with regard to generational attitudes towards financial investments, further research is recommended.