Is Your Risk-Tolerance Assessment Tool Reliable?

What is it about?

Over the past three decades, numerous scaling and attitudinal measurement techniques have been developed to facilitate the assessment of an individual’s financial risk tolerance. Cronbach’s alpha has traditionally been used as the primary measure of scale reliability for assessment tools that have been developed using classical psychometric theory. Recently, however, psychometricians have raised concerns about the ongoing use of Cronbach’s alpha as a robust measure of scale reliability. In its place, some have argued that reliability estimates should be based on Greatest Lower Bound (GLB) and omega estimations. The purpose of this paper is to describe and compare these alternative reliability measures to Cronbach’s alpha for a widely used research-focused financial risk-tolerance scale.

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Why is it important?

Researchers and financial service professionals need reliable and valid tools to accurately assess and evaluate the risk attitudes of household financial decision-makers. This paper describes three methods that can be used to measure reliability. We find that estimates based on Cronbach's alpha, omega, and the GLB, for the most part, result in similar outcomes in the context of financial risk tolerance.

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