Financial Literacy and Financial Risk Tolerance of Individual Investors: Multinomial Logistic Regression Approach

Abstract

Financial risk tolerance is one of the important factors affecting the financial investment decisions of individuals and institutional investors and a crucial factor of financial planning and financial counseling. It is therefore necessary to determine the major determinants of risk tolerance. In this article, we researched the impact of financial literacy level and demographic characteristics on the financial risk tolerance of the individuals in the sample of Usak University staff, using a multinomial logistic regression analysis and retrieving data through the questionnaire method. Multinomial logistic regression is an extension of binary logistic regression, allowing for three or more categories of the dependent variable. The findings of the empirical analysis reveal that financial literacy and demographic characteristics of age, gender, education, and income levels are significant determinants of financial risk tolerance. In this regard, the improvements in the financial literacy of the individuals through various education programs will probably raise the demand of financial products with different risk characteristics and in turn contribute to the development of financial sector.