Evidence of investors risk tolerance … Olweny, T., JEFS (2014), 02(05), 50-58 Journal of Economic and Financial Studies. Page 50 Journal of Economic & Financial Studies, 02(05), 50-58 Vol. 02, No. 05: October (2014) Journal of Economic & Financial Studies Open access available at http://journalofeconomics.org Evidences of investors’ risk tolerance in Nairobi securities exchange: Does education or specialization matter? Tobias Olweny a* a Department of Finance and Accounting, Jomo Kenyatta University of Agriculture and Technology, Kenya. * Corresponding author’s email: toolweny@yahoo.com or tolweny@jkuat.ac.ke : H I G H L I G H T S: 1. The study tests the effect of education or specialization influence risk tolerance. 2. The sample of 500 investors includes investors trading at Nairobi Securities Exchange. 3. Result suggests that education level positively increases risk tolerance, while specialization reduces. Article History A B S T R A C T Received: 08-09-2014 Revised received: 01-10-2014 Accepted: 13-10-2014 Available online: 24-10-2014 Keywords: Heuristics; Logistic regression; Risk tolerance; Specialization. JEL Classification: D14; D61; D91; G11. The main objective of the study is to evaluate the extent to which investors’ education level or specialization in finance or accounting determines investor risk tolerance at the Nairobi Securities Exchange using a total of 500 individual investors out of 9,32,510 investors holding CDS accounts. Data is collected through questionnaires comprising 13- item risk tolerance instrument and demographic attributes that determine individual investors’ risk tolerance. Analytical framework included ordinal logistic regression model, as well as an analysis of variance and Wolfowitz Wald test at α=0.05. The key findings are that investor education level are significant in the determination of risk tolerance only at below the high school level with a positive impact of 1.831 log of odd for every unit increase in risk tolerance. Specialization in finance or accounting discipline also influenced investor risk tolerance at a significance level of 0.022 with a negative impact of -0.389. DOI: http://dx.doi.org/10.18533/jefs.v2i05.145 © 2014 The Authors. This is an open access article under the terms of the Creative Commons Attribution License 4.0, which allows use, distribution and reproduction in any medium, provided the original work is properly cited. 1.0 Introduction Investor risk tolerance is an important aspect in investment decision making. Rigorous theoretical analyses relating risk tolerance to optimal portfolios are based on the economic concept of risk aversion. The first trial at conceptualizing the investors risk aversion belongs to Friedman and Savage (1948), who explained investment behavior using the returns of risky financial investments behavior, and that of risky financial investments utility functions. They argued that the main factor that changes the investor’s attitude towards risk is the size of their wealth. Further studies have shown that there are also other factors with direct impact over the attitude towards risk, which include economic growth forecast of a market, the level of training and experience gained, fluctuations of the exchange market and psychological factors among others. In an effort to understand the factors that influence the degree of risk aversion, Arrow and Pratt (1965), observed that investors with high risk aversion are less willing to take those risks, since the price for the given risk (risk premium) is much higher. In their approach, the main factors of risk aversion were the wealth of investors and the utility measure of the investors risk aversions. There are two major indicators that reflect an investors’ risk tolerance: risk tolerance attitude and behavior; which are synthesized as above to develop utility function of the investor. Risk tolerance; a person’s attitude towards taking risk, is a complex psychological concept. Jackson et al (1992), contend that risk tolerance has four dimensions: financial, physical, social and ethical.