The effects of risk tolerance and financial literacy to investment intentions

Financial decisions have become important to researchers, personal financial planners, investment consultants and policy-makers, particularly considering the changes that have increased the complexity of the economic landscape. Within the domain of financial decision-making, an individual's tendency to take a risk plays a crucial role in the making of financial decisions and in achieving financial goals. This article provides conceptual development of the relationship between financial literacy, risk tolerance and investment intention. Many articles have documented the correlation between financial literacy and a set of behaviours, such as saving, wealth and portfolio choice. Meanwhile, risk tolerance is a significant factor in a number of household financial decisions. In order to predict intentions and behaviour, the planned behaviour theory has tested that attitude, subjective norm and perceived behaviour control as determinants of intention and behaviour. In the context of this study, investors may be interested in investing in a particular company only when they have sufficient time and skill to evaluate the company and also have money to invest. Therefore, when forming an intention to invest, individual investors normally begin with evaluations of various companies' financial positions, based on some objective measures such as return on equity, dividend payout ratio and beta. Next, their emotional perceptions of such evaluations may come into effect as they are trying to justify their investment decisions to purchase the companies' stocks.