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Understanding Financial
Risk Tolerance
Institutional, Behavioral
and Normative Dimensions
Caterina Cruciani
Gloria Gardenal
Giuseppe Amitrano
Understanding Financial Risk Tolerance
Caterina Cruciani · Gloria Gardenal ·
Giuseppe Amitrano
Understanding
Financial Risk
Tolerance
Institutional, Behavioral and Normative Dimensions
Caterina Cruciani Gloria Gardenal
Department of Management Department of Management
Ca’ Foscari University of Venice Ca’ Foscari University of Venice
Venice, Italy Venice, Italy
Giuseppe Amitrano
WieldMore Investment Management
London, UK
ISBN 978-3-031-13130-1 ISBN 978-3-031-13131-8 (eBook)

https://doi.org/10.1007/978-3-031-13131-8
© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022

This work is subject to copyright. All rights are solely and exclusively licensed by the
Publisher, whether the whole or part of the material is concerned, specifically the rights
of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on
microfilms or in any other physical way, and transmission or information storage and
retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology
now known or hereafter developed.
The use of general descriptive names, registered names, trademarks, service marks, etc.
in this publication does not imply, even in the absence of a specific statement, that such
names are exempt from the relevant protective laws and regulations and therefore free for
general use.
The publisher, the authors, and the editors are safe to assume that the advice and informa-
tion in this book are believed to be true and accurate at the date of publication. Neither
the publisher nor the authors or the editors give a warranty, expressed or implied, with
respect to the material contained herein or for any errors or omissions that may have been
made. The publisher remains neutral with regard to jurisdictional claims in published maps
and institutional affiliations.
Cover illustration: © John Rawsterne/patternhead.com
This Palgrave Macmillan imprint is published by the registered company Springer Nature
Switzerland AG
The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland
To our loving families
Preface
This book focuses on the contribution of financial risk tolerance in

shaping the workings of financial markets. It takes a bold approach
combining very different views to understand how this concept, lying at
the crossroads of different domains of study and practice, including finan-
cial regulation, scholarly studies, and financial advisory practice, has been
formalized over the last 30 years.
The book looks at the feedback loop among the different domains
in which risk tolerance is assessed and operationalized to reorganize the
current stream of research on financial risk tolerance and suggests further
relevant domains in which a new risk tolerance definition will need to be
defined.
Using key landmark moments in the normative evolution of financial
services in the European Union including the introduction of the Markets
in Financial Instrument Directive (MiFID) and its successor MiFID 2, this
book will try to highlight the relationship between scholarly definitions
of risk tolerance, key measurement tools, and the formal requirements
imposed by regulatory institutions to key market players.
This book provides a snapshot of the most important dimensions in
which financial risk tolerance has been analyzed and highlights the rela-
tionship between policy-making and scientific endeavor. We touch upon
precursors of financial risk tolerance, reviewing key socio-demographic
variables that have been found to affect it, and move on toward more
dynamic versions of financial risk tolerance that include the role of life
vii
viii PREFACE
events. The different chapters focus on the debate on financial risk toler-
ance in specific time frames marked by regulatory events and provide
an in-depth overview of two important changes in European financial
markets—sustainable investment and fintech and robo advisory. A prac-
titioner’s view section authored by the CEO of a UK-based investment
firm is included as a commentary and includes relevant insights from the
world of financial advisory tied to the academic debate discussed in the
text.
This book represents a valuable contribution to both the academic and
the professional debate as it brings together different streams of litera-
ture in a critical review, exploring the feedback loop between academic
research and financial practice to draw insights on the regulatory future
of financial services.
Venice, Italy Caterina Cruciani

Venice, Italy Gloria Gardenal
London, UK Giuseppe Amitrano
Acknowledgments
The idea to write this book stems from the thought-provoking and
fruitful discussions between persons with different jobs but a similar
passion for knowledge and understanding.
Bringing together a practitioner with decades of experience and two
academic scholars studying financial markets and institutions was our way
to prove that contamination between different approaches is the best way
to look at ever-changing concepts like financial risk tolerance. As financial
markets continue to evolve, there is a profound need for open discussion
and exchange of ideas and we hope that this book provides useful material
in this respect.
A very important part of this book could not have been written
without the support of Federico Melotti and Andrea Papoff at Wield-
More Investment Management, who organized and chaired the webinar
in which we launched the practitioners’ questionnaire discussed in the
last chapter of this book. Caterina Cruciani and Gloria Gardenal wish to
thank Giuseppe Amitrano and all the WieldMore Investment Manage-
ment team for believing in the soundness of the project and for helping
in the promotion of the survey among practitioners.
The list of acknowledgments would not be complete without
mentioning our supporting and loving families. Writing a book is no easy
feat and we all owe the biggest thank you to our spouses and children,
who cheered us along the process, provided inspiration, and much-needed
entertaining breaks and to whom this book is dedicated.
ix
Contents
1 Financial Risk Tolerance: Where Does It All Start From? 1

1 A Crossroad: Why Looking at Risk Tolerance? 2
1.1 The Economists’ View 2
1.2 The Macroeconomic Perspective 3
1.3 The Regulator’s View 5
2 Trends in Financial Risk Tolerance 9
2.1 Definitions of Risk Tolerance 10
2.2 Risk Tolerance Determinants 11
2.3 Measurement Tools 20
3 Conclusions and Roadmap of the Book 30
References 31
2 Risk Tolerance Tools: From Academia to Regulation
and Back 39
1 The Market in Financial Instruments Directive
(MiFID) and its Impact on Risk Tolerance Measurement 40
1.1 Introducing MiFID 40
1.2 MiFID and the Suitability Questionnaire 43
2 The Academic Debate After MiFID 49
2.1 Socio-Demographic Variables 51
2.2 Life Events 53
2.3 Behavioral and Personality Factors 53
2.4 Risk Tolerance: Stable Trait or Adaptive Feature? 54
xi
xii CONTENTS
3 The Market in Financial Instruments Directive 2

(MiFID2) 55
3.1 MiFID2, Context and Content 55
3.2 Suitability and MiFID2 56
3.3 Implementing the Directive: Empirical Evidence
and Practitioners’ Views 57
4 The Academic Debate After MiFID2 60
4.1 Socio-Demographic Factors 60
4.2 Life Events 66
4.3 Behavioral and Personality Factors 67
4.4 Risk Tolerance: Stable Trait or Adaptive Feature? 68
5 Taking Stock and Looking at the Challenges Ahead 72
References 73
3 Challenges and Opportunities in the Regulation
of Financial Instruments Post-MiFID2—Sustainable
Finance 79
1 Sustainable Finance in a Sustainable Union 79
1.1 Sustainable Development in the European Union
Legislation 79
1.2 From Theory to Action: The EU Action Plan
on Sustainable Development 80
1.3 Setting the Plan into Action 82
1.4 The Action Plan and Investor Protection: Taking
Stock and Moving Forward 94
2 Investing in Sustainability—Investor Preferences, Risk
Tolerance, and Investment Behavior 95
2.1 Sustainability Investment—Where Does Europe
Stand? 95
2.2 Sustainable Investors—Who Are They and Why Do
They Choose Sustainable Products? 97
2.3 Are Sustainable Investors Biased? 107
3 Implications for Financial Risk Tolerance
and Investment Choices 112
References 113
4 The Digital Challenge: How Are New Technologies
Shaping the Financial Industry? 119
1 The Technological Revolution of the Financial Services
Industry 120
CONTENTS xiii
1.1 The Digitalization and Open Challenges 120

2 Fintech 121
2.1 A Definition 121
2.2 Fintech Users 122
2.3 Fintech Services 122
2.4 The Academic Point of View on Fintech 124
3 Open Banking and Open Finance 127
3.1 A Definition of Open Banking 127
3.2 The Evolution of Open Banking: Toward Open
Finance 129
3.3 The Academic Point of View on Open Banking 129
4 Robo Advisory 132
4.1 A Definition of Robo-Advisory Services 132
4.2 Business Models for Robo Advisory 134
4.3 The Academic Point of View on Robo Advisory 135
5 The Regulatory Framework 142
5.1 The Payment Services Directive (PSD2) 142
5.2 The Revised Guidelines on Suitability by ESMA
(2018) 144
6 Conclusions 147
References 147
5 Challenges and Opportunities for the Future Investor:
A Practitioner’s Guide 153
1 The Survey 154
1.1 Some Reasons Why 154
1.2 Survey Structure and Participant Pool 154
2 Survey Results 158
2.1 Participants Overview 158
2.2 Sustainable Finance 159
2.3 Robo Advisory and Open Finance 162
3 Final Discussion and Conclusions 170
Appendix: The Questionnaire 171
Index 179
About the Authors
Caterina Cruciani is Assistant Professor in Financial Markets and Insti-

tutions at the Department of Management, Ca’ Foscari University of
Venice, where she also received a Ph.D. in Economics. She is the Oper-
ating Director of the Center for Experimental Research in Management
and Economics (CERME) and a member of the Risk-Lab at Ca’ Foscari
University of Venice. Caterina’s research interests focus on behavioral
finance, financial advisory, and SME financing. Caterina teaches Finan-
cial and Banking instruments, Corporate banking and Behavioral Finance
at the University of Venice and in professional training activities for
financial advisors. Caterina provides regular updates on her latest publica-
tions, achievements, and research interests on the main professional social
networks (LinkedIn, Academia.edu, ResearchGate) and on Twitter.
Gloria Gardenal is Associate Professor of Corporate Finance and a

member of the Risk-Lab and the Center for Experimental Research in
Management and Economics (CERME) at Ca’ Foscari University of
Venice, where she also received a Ph.D. in Business. Her research focuses
on corporate finance, risk management, and investment decisions, with
a particular interest in behavioral finance. She taught several Bachelor’s
and Master’s courses including Corporate Finance, Valuation, Financial
Policies and Investment Strategies and also has been involved in more
advanced courses like M.B.A. in Finance and International Finance. She is
present on the social networks (Facebook and Twitter) and in all the main
xv
xvi ABOUT THE AUTHORS
professional social networks (LinkedIn, Academia.edu, ResearchGate)

where she promotes her published work and academic achievements.
Giuseppe Amitrano is the Chief Executive Officer at WieldMore Invest-

ment Management, London UK. A leading expert as Head of Trading
and Sales, senior Managing Director in rates and credit derivatives with
over 25 years of experience, Giuseppe has created and led fixed income
derivatives teams at Scotiabank, RBS and UBS where he has been running
absolute and relative return strategies. He has been board member of
the Corporate Social Responsibility Committee of Scotiabank Europe,
London. Further to his M.Sc. in Economics he obtained the CISI Level
4 Investment Advice Diploma in 2018.
List of Figures
Chapter 3
Fig. 1 Information flows and market players affected
by sustainability disclosure 94
Chapter 4
Fig. 1 The four types of financial services that currently are and will
be affected by Fintech (Source Adapted by [Basel Committee
on Banking Supervision, 2018; Thakor, 2020)] 123
Chapter 5
Fig. 1 Sustainability and relevant sustainability concerns 160
Fig. 2 Information that may be useful in BETTER dealing
with clients in an Open-Finance framework 164
xvii
List of Tables
Chapter 1
Table 1 Factors influencing financial risk tolerance—an academic
view before MiFID 21
Table 2 Subjective measures of financial risk tolerance
from large-scale representative surveys 28
Chapter 2
view before MiFID2 (2005–2014) 50
view before MiFID2 (2015-now) 61
xix
CHAPTER 1
Financial Risk Tolerance: Where Does It All

Start From?
Abstract This chapter introduces the relevance of the debate on finan-

cial risk tolerance starting from reconstructing the key macroeconomic
changes that progressively expanded the investor base in Europe and
beyond starting in the 1990s, focusing both on financial markets and on
other relevant sectors. The increased investment opportunities available
to the retail investor expanded potential opportunities for financial gain
for individuals but also highlighted the need to provide clear guidelines to
structure and shape these opportunities considering all the risks. The need
to govern this important change in financial markets favored the conver-
gence of different disciplines on the importance of financial risk tolerance:
regulation, academia, and practitioners were all called upon figuring out
how to measure this somewhat elusive concept. This chapter focuses on
the period prior to the introduction of the Markets in Financial Instru-
ments Directive (MiFID) in Europe when financial advisory was not yet
considered a proper financial service and investors were still transitioning
from direct holdings of stock to more flexible tools like mutual funds.
Besides briefly describing the regulatory framework, a literature review of
risk tolerance measurement and drivers is provided, to conclude with a
practitioner’s view regarding the relevance of risk tolerance measurement
in this period.
Keywords Mutual funds · Risk tolerance drivers · Financial knowledge
© The Author(s), under exclusive license to Springer Nature 1

Switzerland AG 2022
C. Cruciani et al., Understanding Financial Risk Tolerance,
https://doi.org/10.1007/978-3-031-13131-8_1
2 C. CRUCIANI ET AL.
1 A Crossroad: Why Looking at Risk Tolerance?

Starting in the 1990s a combination of factors set the stage for a major
convergence of the interests of very different disciplines toward the activi-
ties within financial markets and their implications for the different actors
involved. While economists had been interested in why individuals should
engage in financial markets for decades drawing mixed messages, financial
institutions developed and started offering new investment opportuni-
ties available to most of the population in developed countries. Financial
markets became more necessary as public policies started to change;
contribution-based pension reforms and massive privatization waves in
key utilities rightly attracted the attention of many. The importance of
new professional figures changed as markets started drawing the attention
of less financially literate individuals in need for advice and guidance and
not only financial products. The combination of all these factors finally
attracted the attention of the regulator, interested in shaping this tran-
sition while protecting the interests of all. This section reviews these
major changes starting from the traditional economic view on stock-
market participation and discusses the macroeconomic changes and the
regulatory implications they brought about.
1.1 The Economists’ View

Financial risk tolerance is a key element in the determination of invest-
ment choices that has consequences both on current and future consump-
tion: the level of risk tolerance is likely to determine how much liquidity
is steered toward saving or investing, reducing the liquidity available for
current consumption to increase it in the near or distant future when the
investment bear its results.
A natural starting point for this analysis is understanding why and how
financial risk tolerance matters is asking why individuals should invest
in the financial system. Despite providing numerous opportunities and
services, financial markets expose individuals to artificial risks with the
promise of returns that are governed by the laws of probability rather
than by natural laws they are accustomed to.
One starting possibility is that participation in financial markets yields
positive results for society as a whole. In this context, a large litera-
ture developed on stock-market participation and wealth. While the
1 FINANCIAL RISK TOLERANCE: WHERE DOES IT ALL START FROM? 3
macroeconomic literature is not conclusive on whether increasing stock-

market participation improves general welfare (Basak, 1996; Black, 1974;
Errunza & Losq, 1985, 1989; Eun & Janakiramanan, 1986; Stulz, 1981;
Subrahmanyam, 1975), a key finding is that increases in stock-market
participation do not necessarily reduce wealth inequality in the population
in the medium run. Individuals differ along a variety of relevant dimen-
sions and their attitudes and propensities make them enter and exit the
stock market at different times: more risk averse, less financially educated
individuals are drawn to participating in market upswings but tend to
leave the stock market in the downswings and be replaced by larger stock-
holders. Thus, despite larger participation, individual wealth inequalities
are not necessarily reduced (Bilias et al., 2017).
Individuals feel differently about risky investment, but classic portfolio
analysis suggests that those interested in utility maximization might want
to hold at least some stocks, as they indisputably yield higher returns,
provided that the portfolio is properly constructed (Arrow, 1994). Thus,
even risk averse individuals may take on some risk provided that it is
correctly managed.
In the 1990s the empirical evidence focusing on stock-market partic-
ipation showed that despite this theoretical consideration there were
individuals who did not invest in stocks with major differences across
countries. Guiso et al. (2003) show that total participation in financial
markets ranged from 54% of individuals in the United States to 15% in
Italy and explain these diverse patterns by discussing entry costs into the
stock market related to the supply of more affordable financial products
or to the pressure to plan for the future due to institutional changes
in the pension systems. Guiso and colleagues conclude that individual
differences in households (especially in terms of risk aversion and finan-
cial education) are a key factor to monitor the long-term implications of
larger participation.
1.2 The Macroeconomic Perspective

The 1990s represent a very interesting decade for stock markets all over
the world that affected the direct and indirect entry costs: among the first
group, we find changes in market supply (both in terms of quantity and
quality) that differentially affected the United States and Europe. Indirect
entry costs were shaped by changes in neighboring sectors that will be
discussed shortly.
For what concerns supply, a general trend, that affected countries all
over the world, regards the wave of privatization of public utilities that
brought to the market well-known stocks with a large potential investor
base. Already started in the late 1970s, the privatization of State-owned
enterprises saw almost 2500 deals in 121 countries being concluded over
the period 1977–1999 for a net worth of over 1110$ billion (Bortolotti
et al., 2004). Privatizations benefit from more liquid stock markets that
can accommodate larger issues easily, increasing the speed and size of
the revenues. Using a panel of 34 countries over the 1977–1999 period,
Bortolotti and colleagues empirically show that privatization waves tend
to exploit hot market periods: the increase in the extent of privatization
activities thus signals that domestic stock markets have already become
more liquid.
In terms of direct entry costs, the blossoming of the mutual stock
fund industry finally brought to investors easy access to well-diversified
products, helping the transition from direct acquisition to fund subscrip-
tion (Guiso et al., 2003). The growth in the mutual fund industry was
remarkable all over the world: between 1992 and 1998 the average annual
growth rate of US mutual funds was over 22.4%, while European funds
grow by an annual rate of 17.7%. The development of equity mutual
funds was stronger in the United States than in Europe where bond funds
were more popular (Fernando et al., 2013). Mutual funds are naturally
targeted to households looking for a good level of diversification with
a relatively low level of fees and commissions: individual investment is
pooled and invested in very diversified funds, whose policy is defined in
advance and is not subject to the preferences of the investors participating
in the fund. While mutual funds require well-developed securities markets,
where market integrity and liquidity are high (Fernando et al., 2013),
they also have the potential to enlarge the investor base to less financially
educated individuals, who might otherwise refrain from investing (Guiso
et al., 2003). The overall effect of these trends is that new entrants—less
educated than experienced stockholders and with fewer financial means to
face the stock-market fluctuations—will influence the behavior of excess
returns on equity, as education tends to correlate negatively with risk
aversion (Guiso & Paiella, 2018).
Another macroeconomic factor that supported the increased pace in
the regulation of financial markets to support the demand for financial
products is that improved levels of well-being led to the progressive aging
of the population in many countries. Economists were already puzzled
by the evidence that many individuals tend to save too little to ensure a
similar standard of living after retirement (Bernheim et al., 2000). This
evidence was abundant, especially in the literature regarding the United
States, where individuals were already called upon to make important
decisions regarding their pension during their working life. For instance,
Bernheim finds that individuals undersave for retirement as they tend
to hold too optimistic expectations regarding their future wealth, do
not possess an adequate level of financial literacy—the ability to under-
stand and use correctly key notions in economics and finance—and do
not have access to high-quality guidance in making financial decisions
(Bernheim, 1998). While the author called for more effective finan-
cial education programs, later evidence has shown that such programs
have at best a limited effect. Collins et al. (2010) find some positive
effects in 41 programs but highlights that any attempt at evaluating
such programs suffers from a self-selection bias, as one cannot rule out
that only the more motivated individuals sign up. Often the effect of
these programs is limited to some decision domains such as savings and
barely distinguishable from what happens in control groups (Miller et al.,
2015); moreover, the decay is as rapid as 20 months after the program is
complete (Fernandes et al., 2014). An increase in life expectancy has the
potential to magnify the scale of this pension unpreparedness with a major
impact on the economy. At the same time, the 1990s saw the beginning of
a transition from defined-benefit to defined-contribution welfare systems
in Europe, which further increased the need for efficient financial plan-
ning for retirement even in countries where stock-market participation
was low.
1.3 The Regulator’s View

At the European level, the 1990s brought about a new wave of legislation
that supported the creation of the common financial market and initiated
shaping the features of investment services and investor protection and
regulating the responsibilities of the different market actors.
Following the introduction of the Single European Act in 1987 (Euro-
pean Commission, 1987), the Maastricht Treaty formalized the structure
of the internal market and established that free movement within the
European Union should extend beyond people, goods, and services to
capital as well. The Treaty formally established the European Union,
set the stage for the introduction of the Euro as the Union’s common
currency, and created the banking Union with the Single Supervisory
Mechanism (Treaty on the European Union, 1992).
Free movement of capital1 extends from real investment and purchases
to security investments of all kinds, reducing the frictions and the entry
costs into any market within the European Union.
Investment services in this new operational landscape are regulated
by another landmark document in European history: the Investment
Services Directive (ISD) in the securities field, introduced in 1993
(European Commission, 1993). The Directive provides clear definitions
of key investment services and investment tools and defines rules for
offering these services in the Union introducing some key concepts
regarding the supply of financial services that will remain crucial in
EU legislation to come. The Directive has two key goals: setting up
the rules of conduct and practice for banks and investment firms to
ensure free movement of capital and strengthen the Union, and “to
protect investors” while taking “account of the different requirements
for the protection of various categories of investors and of their levels of
professional expertise” (Preamble, p. 2).
Concerning investment firms, the Directive clearly describes the
process through which they may be authorized to operate in a Member
State and includes financial products under the umbrella of the principle
of mutual recognition, by which all investment firms that are authorized
in one Member State are allowed to do so in others “as long as they
do not conflict with laws and regulations protecting the general good in
force in the host Member State” (Preamble, p. 2). Title V of the Direc-
tive defines more closely the rules regarding this mutual recognition that
require investment firms to either establish a branch in the Member State
where they wish to provide investment services or operate directly if they
already have the authorization for those services in their own Member
State.
The Directive spells out clearly the “conditions for taking up business”
in the Union (Title 2), and the necessary requirement an investment firm
needs to possess to be authorized are included in Article 3, where both
1 Any restrictions on the free movement of capital in the EU will be then safeguarded
also in the other key document forming the constitutional basis for the European Union,
the Treaty on the function of the European Union (Treaty on the Functioning of the
European Union, 2012), which states it explicitly in Article 63 and extends also to
payments (Art. 63 point 2).
financial soundness and good reputation are necessary (Article 3 point

3). Supervision of the quality of the financial players in the European
market is further ensured by the Directive, which lays out both pruden-
tial rules and rules of conduct for the market players: in fact, Article
10 discusses the “prudential rules which investment firms shall observe
at all times” (p. 10) that include internal control practices and sound
accounting procedure, but also careful record-keeping and care to prevent
conflict of interests between firm and clients or between clients.
Article 11 lays out the broad architecture for the rules of conduct,2
ranging from the integrity and competence of the investment firms to
the importance of discussing with the clients their “financial situations,
investment experience, and objectives as regards the services requested”
(p. 11). More importantly, Article 11 marks the first step in the pursuit
of what will become a longer-term effort of the European legislator in
disciplining the provision of financial advice and the distinction between
different categories of investors. In fact, the article explicitly states that
the rules of conduct need to be applied keeping in mind the “professional
nature of the person for whom the service is provided” (p. 11) setting the
stage for the now well-known distinction between retail and professional
clients.
The need to formalize the distinction between sophisticated and
retail investors is one of the key points regarding investor protection
that is called for in another landmark document in the history of financial
services in the European Union. The Financial Services Action Plan
(FSAP), introduced in 1999 (Commission of the European Communi-
ties, 1999) laid out three objectives for the European common capital
market, namely establishing a strong, single wholesale market, making
retail financial markets open, and strengthening the prudential supervi-
sion. The FSAP recognized that the process of harmonization within the
Union was not yet complete and that the Investment Services Directive
needed to be improved. It is notable that once again, alongside more
precise rules for the involvement and operating of investment firms, the
Action Plan mentions explicitly the need for consumer protection. In
2 Although these rules apply to all services, the Directive includes financial advisory
as a non-core service in Annex C and clearly states that investment firms that only
provide financial advice may not receive authorization to operate: “Authorization within
the meaning of this Directive may in no case be granted for services covered only by
Section C of the Annex” (Article 3).
particular, the Plan mentions that any obstacles to the integrated market
should be removed to ensure that consumers have access to increased
choice and competitive terms, to build and support trust. The Plan calls
for the clarification of the “essential requirements” at the heart of the
EU financial legislation, highlighting that “a high consumer protection”
should be at their basis (p. 16). The Plan calls explicitly for clear rules
for business conduct in terms of sophisticated and retail investors since
Article 11 did not provide a criterion to distinguish between different
professional nature of clients but help in this respect was provided by the
Forum on European Securities Commission (FESCO) in March 2000.
FESCO brings together the securities regulators of the countries of the
European Economic Area (EEA) to provide their experience and support
to coordinate action toward the implementation of the Single Market and
is instrumental in the discussion and elaboration of common standards
to regulate financial services in areas where legislation did not provide
proper harmonization guidelines (Demarigny, 2000). For what concerns
the application of Article 11 of the ISD, FESCO provided precise criteria
to identify professional investors (FESCO, 2000) focusing on the needs
and professional competence of the client as required by the ISD. The
criteria suggest that professional investors require a less stringent degree
of protection considering their professional qualifications. Two categories
of entities are classified as professionals: the first includes entities that
are required to be authorized to operate in the provision of financial
services in the EU (such as credit institutions and investment firms) and
national governments and central banks; the second one includes large
and institutional investors which must explicitly request to be treated as
professional clients. The first category may also request to be treated as a
non-professional client and have access to a greater degree of protection
in the conduct of business.
A year later FESCO published another paper commenting on the
application of Article 11 to address the lack of harmonization in busi-
ness conduct across the different Member States to ensure an equivalent
degree of protection throughout the EEA, improve investment flows in
the EEA and promote cooperation between competent authorities in
terms of conduct rules (FESCO, 2001). The paper asserts the principle
that all investment firms must act honestly fairly and correctly, dele-
gating to other firms only when professionally relevant and engaging
in interaction with authorized firms only (Principle 1). Investment firms
must communicate clear, fair, and not misleading information that should
be sufficient to make relevant decisions (Principle 21). The information

provided should regard both the investment firms (Principles 33 and 34)
and the financial instruments and products (Principles 36 and 37). It
is noteworthy that the FESCO principles and rules dedicate an entire
section to “Risk warnings,” suggesting that the information provided
regarding risk should be pertinent not only to the financial investment but
also to “the client’s knowledge, experience, investment objectives, and
risk profile” (Principle 53, p. 18). An entire section of the paper is devoted
to the Know-your-client principle, covering investment objectives, risk
profile, financial situation/capacity, trading restrictions, the identity of the
clientele, and the suitability of the investment product provided (Sect. 3).
This section presents clear rules to perform client analysis, which include
“types of services, transactions, and products the client is familiar with
and his trading history, i.e., the nature, volume, frequency and timeframe
of his transactions” (Rule 72, p. 21) and “temporal horizon of the client’s
investments, as well as his preferences regarding risk-taking, profitability,
and recurrent earnings” (Rule 73, p. 21), while there is no clear guidance
as to how to obtain information about the client’s financial situation and
capacity, which should be “sought as appropriate in the context of the
services rendered” (Rule 74, p. 22).
The joint effort of the ISD, the FSAP, and the FESCO papers clearly
paint the picture of the investor protection that the European regula-
tors have in mind in terms of broad contents, but there seems to be no
indication as to the form in which this information needs to be collected.
2 Trends in Financial Risk Tolerance

The previous sections described the backdrop in which participation in
financial markets started increasing, highlighting that well-functioning
and liquid capital markets were crucial both to address endogenous
changes in population dynamics and to cement the new monetary Union
that was taking shape in Europe in the 1990s. The regulatory effort was
aimed at drawing the general rules of conduct of the different players,
laying the foundations for mutually fruitful interaction between investors
and investment firms, while at the same time smoothing out the differ-
ences in business practices and investment products that existed in a yet
not fully harmonized European financial market.
While the key concepts of consumer protections were laid out, a great
degree of flexibility in their translation into actual practices was allowed.
Clear goals without as-clear directions might have been then informed
by the large and growing literature on financial risk tolerance coming
from empirical academic studies. The goal of this section is to summa-
rize the key insights coming from scientific work regarding risk tolerance
definitions and measures to understand the degree of interaction between
the regulatory needs to address risk tolerance for investor protection and
the scope of academic research. Given the importance of the MiFID
Directive in shaping the measurement in financial risk tolerance, all the
evidence presented in this chapter dates before its introduction, leaving
to Chapter 2 to pick up on this literature review for the years that follow.
2.1 Definitions of Risk Tolerance

Academics have defined financial risk tolerance differently over time. A
generally accepted definition is “the maximum amount of uncertainty that
someone is willing to accept when making a financial decision” (Grable,
2000, p. 625). However, it is not the unique one. According to the preva-
lent literature at the end of the XX century (see, for example [Droms,
1988; Roszkowski et al., 1993]), there were few, if any, generally recog-
nized measures designed to ascertain someone’s financial risk tolerance
or preference. There was a flourishing of “in-house” metrics created by
financial planners of the time, but no one emerged as the standard by
which the others could be evaluated.
The literature shows at least three diverse ways of defining risk toler-
ance: a “self-perceived risk tolerance” measure, which is usually measured
by survey questions about the respondents’ subjective risk tolerance
(Grable & Lytton, 1998; Hanna & Chen, 1997), a numerical scale
to represent the degree to which people are risk tolerant (Hanna &
Chen, 1997) and, finally, as the ratio between risky financial assets to
total assets or risky assets to net worth (i.e. objective risk tolerance).
These varied ways of defining financial risk tolerance determined some
inconsistencies in the analysis of its determinants that will be thoroughly
described in the following sections. It is worth mentioning that, up to
the year 2000, many studies focused on determining the attitudinal and
personality factors affecting risk tolerance, while the socio-economic and
demographic factors have been studied less extensively (Grable, 2000).
After 2000, more studies have tried to systematize the findings concerning
these factors, particularly after the MiFID in Europe. The following
section summarizes key determinants of financial risk tolerance in the
empirical literature grouping them into socio-demographic factors.
2.2 Risk Tolerance Determinants

2.2.1 Socio-Demographic Factors
This section reviews the key literature regarding the main socio-
demographic determinants of risk tolerance in empirical literature, which
include age, gender, occupation, marital status and the presence of
economic dependencies, ethnicity, financial education, and financial
literacy.
The evidence about the relationship between risk tolerance and age
shows some inconsistencies mainly due to the use of different definitions
for risk tolerance. Overall, most of the studies show a negative relationship
between risk tolerance and age: older people appear to be less risk tolerant
(Bajtelsmit & Bernasek, 1996; Chang et al., 2004; Grable & Lytton,
1998; Hawley & Fujii, 1993; Sung & Hanna, 1996; Wang & Hanna,
1997). A possible explanation for these findings is that older people have
less time to recover losses, and for this reason, they become less tolerant
of risks while aging.
Other studies showed mixed results: (Morin et al., 1983), for example,
show that, on average, risk tolerance decreases as age increases. More
specifically, risk tolerance decreases with age for households with a low
level of net worth but increases with age for households with a high
level of net worth. Wang and Hanna (1997) test the life-cycle hypoth-
esis using data from the 1983–1989 Survey of Consumer Finance (SCF)
panel and find that risk tolerance increases with age when other variables
are controlled.
Another study that proves the opposite result is (Grable, 2000): using
a random sample of faculty and staff (591 women and 484 men ranging
in age from 20 to 75 years) working at a large US southeastern university
in 1997, he finds that older people are more risk tolerant. As a possible
explanation, Grable shows that taking into account possible interactions
between and among the demographic, socio-economic, and attitudinal
variables, a combination of education, financial knowledge, income, and
occupation explained the most between-group variability in risk toler-
ance (about 22%), confirming that an extensive and systematic analysis of
other demographic, socio-economic, attitudinal, and psychological factors
might be used to differentiate among levels of risk tolerance more effec-
tively, either individually or in combination. Moreover, he claims that
understanding a person’s financial risk tolerance is a complicated process
that goes beyond the exclusive use of socio-economic factors and more
research is needed in the domain of business and psychology (Grable,

2000, p. 629).
Another interesting result is provided by Chang et al. (2004), who
show that in their sample age is related to objective risk tolerance (how
people invest), but it is not related to subjective risk tolerance (what
people say about their tolerance for risk). This may provide support for
the necessity, on one side, that financial advisors help each client assess
their risk tolerance and, on the other side, that they review the topic
frequently because objective risk tolerance is likely to decline at some
point.
Finally, other studies show that the general pattern of age seems to be
that risk tolerance decreases with age after 45, which suggests that risk
tolerance exhibits a hump-shaped pattern, i.e., it increases with age and
then decreases. As proof of that (Hariharan et al., 2000) found that risk
tolerant investors nearing retirement did not reduce their bond allocations
in order to buy more stock.
Moving on to gender, the literature about financial risk tolerance
and this factor is very broad. In the pre-MiFID era findings seem to be
consistent and show that men are overall more risk tolerant than women
(Bajtelsmit & Bernasek, 1996; Hawley & Fujii, 1993; Sung & Hanna,
1996).
Sung and Hanna (1996) look at differences in risk tolerance among
single women, single men, and married couples and find that single
women have lower risk tolerance with respect to both married couples
and single men.
Chang et al. (2004) show some further evidence: using the 2001
Survey of Consumer Finances (SCF), they find that single women declare
to have less tolerance for subjective risk, but there is no difference
compared to couples regarding their investments. This might be due to
the fact that some single women in the survey are widows or divorced
and their assets might reflect their previous status as part of a couple.
However, according to the authors, this evidence suggests that financial
advisors should discuss risk tolerance with each client regardless of their
gender. The authors also confirm the results by Sung and Hanna (1996)
and find that couples are more likely to be risk tolerant than either unmar-
ried women or unmarried men. Unmarried women appear to be less risk
tolerant than unmarried men.
Occupation is another relevant driver in determining individuals’ risk
tolerance. According to many studies, being employed in a professional
occupation is positively associated with risk tolerance (Grey & Gordon,

1978; Lee & Hanna, 1995; Leonard, 1995; Masters, 1989; Meyer et al.,
1961; Quattlebaum, 1988). Haliassos and Bertaut (1995) as profes-
sional occupations guarantee higher wages on average and higher financial
stability.
Sung and Hanna (1996) use the 6 categories of the 1992 Survey
of Consumer Finance (SCF)—i.e., managerial and professional specialty;
technical, sales, administrative support; service; precision production,
craft, repair; operators, fabricator, laborers; farming, poultry, fishing—and
find that households with a self-employed head tended to be significantly
more risk tolerant than those that did not have a self-employed head.
However, other occupation variables were not significantly related to risk
tolerance controlling for other covariates, except for the actual risk toler-
ance for households headed by someone in a managerial/professional
occupation, which was higher than those in other occupations, confirming
the findings previously mentioned.
Grable and Lytton (1998) show that self-employed people (but also
farmers in their sample) were significantly more likely to be willing to take
risks than otherwise similar households with different occupations. Chen
and DeVaney (2002), instead, comparing those who owned businesses
and those who worked for someone else, found that risk tolerance was
positively related to net worth for owners, but there was no significant
relationship between risk tolerance and net worth for those who worked
for someone else.
Overall, risk tolerance seems to be certainly higher for professionals
and for those who are self-employed.
Changes in family structures have long been observed to produce
variations in risk tolerance. These variations may be due to a variety of
reasons: variations in preference elicitation methods, different definitions
of risk preferences, different population studied, different methodological
choices. Such variations are robust—they occur across different studies
in a very similar manner. Moreover, it is important to point out that the
robustness of these findings draws also from a theoretical appraisal of how
changes in family structure may affect risk preferences. Disregarding the
traditional expected utility framework, which has proven inadequate to
address these risk preference variations, there are at least three other theo-
retical strands that provide support to the evidence we will soon describe
(Chaulk et al., 2003). Getting married or having children may affect what
an individual perceives as a basic need, thus producing choices that are
seemingly not consistent with one’s attitude to risk. This explanation

is based on a hierarchical model of needs à la Maslow (1954): getting
married may increase resources and help meeting basic needs more easily,
making the possibility to meet secondary needs more likely. Alterna-
tively, even prospect theory (Kahneman & Tversky, 1979; Tversky &
Kahneman, 1992) offers a useful framework for interpreting changes
in observed choices and underlying preferences when family structure
changes. Getting married or having a child may change the mental frame
that individuals use to assess gains and losses, producing choices that
are, once again, seemingly inconsistent with previously observed ones.
Last but certainly not least we may draw important insights from family
development theory, which suggests that family changes bring about a
change in expectations (both personal and societal) and in the potential
for future changes. Interestingly, family development theory theoretically
predicts why having a first child brings about more marked changes in
risk preferences than any other following child or why men and women
may change their risk preferences differently despite facing the same
event (e.g., marriage and parenthood). Chaulk et al. (2003) highlight
the connection between prospect theory and family development theory,
with the latter providing the aspirational level over which gains and losses
are defined over time.
Exploring the role of marital status, increasing levels of risk toler-
ance have been associated with being single (Baker & Haslem, 1974;
Lazzarone, 1996; Roszkowski et al., 1993; Sung & Hanna, 1996).
Married couples have a more conservative approach with respect to risk-
taking but results also depend on the size of the households. Results in
this regard are mixed. For example (Sung & Hanna, 1996) find no rela-
tion between the size of households and risk tolerance. They find no
significant differences among households of different sizes when other
variables were controlled, although the actual level of risk tolerance was
lower for households with 5 people than for other sizes. On a different
note (Grable & Joo, 1999) show that size of households matters: the
higher the dependencies, the lower risk tolerance.
Another driver of risk tolerance in empirical analysis is individual
ethnicity. Around the end of the Nineties, the United States started to
be concerned about Blacks being less involved in the financial markets
with respect to Whites, thus missing the possibility to benefit from market
gains (Boyce, 1998). For this reason, many authors started to investigate
if that evidence could be the consequence of differences in risk tolerance
driven by race or by cultural differences. Some of the studies have demon-

strated that White non-Hispanic households tend to be more risk tolerant
than Hispanics, both using subjective and objective measures of risk toler-
ance (Chang et al., 2004). Other studies have shown exactly the opposite:
using a sample of 220 white-collar clerical workers, (Grable & Joo, 1999)
find that non-White respondents tended to be more risk tolerant.
Sung and Hanna (1996) take a different perspective: they find that
Hispanics were less risk tolerant than otherwise similar White non-
Hispanics, but this fact might seem to reflect purely subjective differences.
For instance, this result might reflect a purely cultural difference. More-
over, they claim that it is equally plausible that the difference reflects a
lack of understanding of the nature of financial risk. It is also possible
that the groups with predicted lower risk tolerance had more uncertainty
about non-investment income, even though some objective factors such
as occupation and education were controlled.
Gutter et al. (1999), using data from the 1995 Survey of Consumer
Finance, develop a life-cycle savings model incorporating socio-economic,
financial, and attitudinal variables that shows that the observed racial
differences in the individual determinants of risky asset ownership are
centered on the impact of children and household size. Having children
in the household increases the likelihood of stock or business hold-
ings for Black households. Household size is negatively related to risky
asset ownership for Black households. The same variables do not have a
statistically significant effect on White households. Moreover, the paper
shows that there are no racial differences in the impact of the reported
willingness to take risk through risky asset ownership, thus eliminating
the prejudice that there are racial differences and Blacks perceive risks
differently with respect to Whites.
Risk tolerance is also affected by two very important “dimensions”
explicitly stressed by the EU Regulator in Principle 68 letter c of the
2001 Consultative Paper promoted by FESCO3 : financial education
and financial literacy. Individuals’ knowledge of financial markets and
products clearly represents a relevant dimension for the Regulator, who
3 FESCO establishes that it is the responsibility of the investment firm to identify the
most suitable products for its clients, after determining “client’s knowledge and experi-
ence in the investment field, his investment objectives and risk profile, and his financial
situation/capacity” (FESCO, 2001, p. 21).
considers it a key aspect to determine the suitability of the financial

products promoted by the investment firms.
Financial knowledge can arise from three main sources: education,
“field experience,” and specific financial education programs. Looking at
education, many studies in the pre-MiFID era investigated the relation
between this driver and the attitude toward risk-taking. Hawley and Fujii
(1993) using the 1983 Survey of Consumer Finances analyze the rela-
tionship between net worth and individual characteristics on risk tolerance
and find that education, income, and debt were positively related to risk
tolerance. The same pattern of relation is confirmed also by Warner and
Cramer (1995), Lee and Hanna (1995), and Sung and Hanna (1996),
using different survey data. The relation is confirmed also considering
different measures of risk tolerance. For example, Chang et al. (2004)
use both objective and subjective risk tolerance measures and find that
as the level of education increases, risk tolerance increases as well. More
specifically, households with only a high school education or less were the
most likely to indicate no tolerance for risk.
However, financial knowledge cannot be simply approximated by
education but may be affected by experience in the field. Chen and
Volpe (1998) found that a large percentage of college students were
not knowledgeable about personal finances. A 20-question survey of
1467 mutual fund investors conducted jointly by Money magazine and
the Vanguard Funds Group showed that most investors had inadequate
knowledge about their mutual fund investments (Updegrave, 1996). In a
survey commissioned by the Investor Protection Trust (Crenshaw, 1996)
less than one-fifth of all individual investors (in stocks, bonds, funds, or
other securities) could be considered “financially literate” based on their
responses to a quiz.
Alexander (1998) examine responses from a survey of 2000 randomly
selected investors in mutual funds (the OCC/SEC survey) and develop
their own measure of financial literacy. Their results show that the average
investor’s score is five out of nine. Moreover, investors purchasing directly
from fund companies scored much higher than any other fund group.
Broker and pension plan purchasers also scored significantly higher than
those buying mutual fund shares through other distribution channels.
However, bank and insurance company purchasers received significantly
lower mean quiz scores than other survey respondents. Authors also
examine respondents’ financial literacy results together with several demo-
graphic and financial characteristics differentiated by the number of
channels used to buy mutual funds. They discover that multiple-channel

purchasers have significantly higher financial literacy scores than those
who used only a single channel (5.70 vs. 4.44, respectively), with the
largest difference being in the pension channel (5.78 vs. 4.21). The
average quiz score was higher for males and for those respondents who
work in the financial services industry and generally increased with age,
education, and income. Finally, they investigate the sources of information
used to get knowledge about the investments and find that respon-
dents who reported that financial publications and the prospectus were
the best sources of information scored significantly higher in financial
literacy. In contrast, those who relied on family or friends, bank repre-
sentatives, employer-provided printed materials, and insurance company
representatives scored significantly lower.
The evidence just reported triggered the emergence of new mandates
for national governments to educate and protect financial consumers
(OECD, 2005). Therefore, regulators began to promote financial literacy
education, attempting to change how consumers behaved and empow-
ering them to reduce barriers to market participation and improve the
accessibility of relevant information (e.g., Cartwright, 2004; Fox et al.,
2005; Howells, 2005). According to this perspective, financial education
works in concert with consumer protection measures to improve decision-
making skills and enables individuals to make use of remedies such as
disclosure and reflection rights. It is within this framework that many
studies tried to investigate and measure individual financial knowledge
and to discover their relations with financial risk tolerance.
Among academics, financial knowledge started to be identified with
two distinct expressions: financial education and financial literacy. Finan-
cial literacy can be defined as measuring how well an individual can
understand and use personal finance-related information (Huston, 2010).
Financial education mainly refers to the education programs that can be
offered to individuals to increase their financial literacy.
Many studies run on high school students consistently found that they
were not receiving a good education in personal financial fundamen-
tals and had poor knowledge (see for example, Bakken, 1967; Langrehr,
1979). In a study of 1509 high school seniors from 63 schools, Mandell
(1997) reported an average correct score of 57% in the areas of income,
money management, savings and investment, and spending. His conclu-
sion was that students were leaving schools without the ability to make
critical decisions affecting their lives.
2.2.2 Economic Factors

This category encompasses studies that address the role of income,
wealth, and retirement.
Income is a good predictor of risk tolerance and results are pretty
consistent: overall, increased levels of income are associated with higher
risk tolerance (Baker & Haslem, 1974; Cicchetti & Dubin, 1994; Cohn
et al., 1975; Grable & Joo, 1999; Lee & Hanna, 1991; Masters, 1992;
Schooley & Worden, 1996; Shaw, 1996; Zhong & Xiao, 1995).
According to Malkiel (1996), the risk that an individual can afford
to take depends on the total financial situation, including the types and
sources of investment income. Hanna and Chen (1995) use an expected
utility and simulation approach to derive optimal portfolios, based on risk
aversion and the ratio between a household’s financial investment port-
folio and total wealth, including human wealth. They show that this ratio
is important to determine what level of volatility is optimal for a portfolio,
and that ratio would tend to be related to such objective factors as years
until retirement. Based on plausible assumptions about risk aversion and
the actual distribution of the ratio of financial assets to total wealth in
the United States (Lee & Hanna, 1995) find that it would be rational for
most households to have only stocks in portfolios intended for long run
goals such as retirement. For younger workers investing for retirement,
willingness to accept some risk (volatility) would lead to substantially
greater wealth at retirement (Chen & Hanna, 1996).
Risk tolerance affects individuals’ willingness to invest in the financial
market. This fact influences both the current amount of invested wealth
but also how much money individuals will have at their disposal at retire-
ment. Sung and Hanna (1996) try to understand how risk tolerance is
related to the number of years until expected retirement and find that
those who are 30 years or more away from retirement have significantly
higher risk tolerance than otherwise similar respondents whose expected
retirement was closer. Instead, Bernheim (1998) stresses an important
issue discussed earlier: individuals undersave for retirement as they tend to
hold optimistic expectations regarding their future wealth, do not possess
an adequate level of financial literacy, and do not have access to high-
quality guidance in making financial decisions. While the author called
for more effective financial education programs, later evidence has shown
that such programs have at best a limited effect. Hariharan et al. (2000)
use a large individual-level data set to isolate the effects of risk toler-
ance on portfolio composition. They test and confirm two predictions
of the Capital Asset Pricing Model: (1) increased risk tolerance reduces
an individual’s propensity to purchase risk-free assets; and (2) higher risk
tolerance does not affect the composition of an individual’s portfolio of
risky assets. More specifically, they find that risk tolerant investors nearing
retirement do not reduce their bond allocations to buy more stock.
2.2.3 Personality Psychology

For many years, academics have investigated the personality factors
affecting financial risk-taking. One personality factor found to be linked
consistently with financial risk-taking is sensation seeking (Wong &
Carducci, 1991; Zuckerman, 1983; Zuckerman et al., 1978). Sensation
seeking is “the need for varied, novel, and complex sensation and expe-
riences and the willingness to take physical and social risks for the sake
of such experiences” (Zuckerman, 1979, p. 10). Wong and Carducci
(1991) use the concept of sensation seeking—which was proved to be
positively related to risk-taking associated with gambling—to investigate
if it can be extended to everyday money matters. Among the various
results, the authors show that high sensation seekers within each gender
group tend to take greater risks with everyday money matters. So, high-
sensation-seekers women take more risks than the low-sensation-seeker
ones. Furthermore, males were observed to engage in greater financial
risk-taking than females irrespective of their sensation-seeking scores.
Another personality factor associated with risk-taking behaviors is the
Type A behavior pattern (cf. Haynes & Matthews, 1988). This behav-
ioral pattern is characterized by individuals who are hard-driving and
competitive, with an underlying tendency for hostility and aggressiveness,
and a heightened sense of time urgency and impatience (Friedman &
Rosenman, 1974; Houston & Synder, 1988; Strube, 1991; Thoresen &
Low, 1990). This behavioral pattern has been found to be associated
with a tendency to maximize achievement in situations involving intel-
lectual and physical pursuits and a willingness to take extended personal
risks to do so (Carver et al., 1976; Haynes & Matthews, 1988; Howard
et al., 1977; Lovallo et al., 1986; Matthews & Siegel, 1983; Mettlin,
1976; Sorenson et al., 1987; Weidner & Matthews, 1978). However, this
research has not investigated how such willingness to take personal risk
can translate to situations involving personal finance. Some general impli-
cations for the Type A pattern in mediating willingness to take financial
risks is based on factors like the generally competitive nature of Type
A individuals and their concern for achievement (Houston & Snyder,
1988; Strube, 1991; Van Egeren et al., 1982). In their attempt to achieve
economic success, the Type A behavior pattern is associated with a will-
ingness to take greater risks in everyday financial matters than that of the
Type B behavior pattern. Moreover, as Type A individuals tend to possess
a higher income level than Type B individuals (Thoresen & Low, 1990),
such financial security might make it possible for Type A individuals to
be willing to take greater financial risks than Type B individuals. In their
study, (Carducci & Wong, 1998) analyze Type A and B individuals and
find that Type A subjects are significantly more risk tolerant than type B.
This can be explained by the tendency of Type A individuals to be gener-
ally more competitive and concerned with personal achievement (Ray &
Brozek, 1980) and to be recognized in an industrial society (Houston &
Synder, 1988). Type A subjects care a lot about their financial success, as
it is used by society to identify a successful person. Since financial success
is proportional, in a sense, to the financial risk taken, Type A individuals
would be more willing to take greater financial risks to achieve financial
success and be recognized as successful by society. The tendency of Type
A individuals to possess a higher income level than Type B individuals (cf.
Thoresen & Low, 1990) is another possible reason for their willingness
to take greater financial risks than Type B individuals.
The following table provides a summary of all the papers mentioned
organized by topics and subtopics (Table 1).
2.3 Measurement Tools

The role of risk attitudes in shaping individual decision-making has been
a major theme in economic literature from the earliest models of deci-
sions under uncertainty onward. Despite the centrality of risk tolerance
for the definition of an appropriate financial plan, a generally agreed-upon
measure of this concept was still lacking in that decade. Notwithstanding
this, the empirical effort in measuring risk tolerance spurred a lot of
research in economics, finance, and psychology literature. The finan-
cial planning literature proposes a categorization of the tools used to
measure risk aversion that includes choice dilemmas, utility theory, objec-
tive measures, heuristic judgments, and subjective measures (Grable &
Lytton, 1999). In consumer research literature three different method-
ologies to assess risk preferences are present: choice dilemmas, gambles,
and self-reported measures (Mandrik & Bao, 2005). The economic
theory uses different metrics within the Expected Utility framework
Table 1 Factors influencing financial risk tolerance—an academic view before MiFID
Variable Effect References

1
Age Negative relationship Bajtelsmit and Bernasek (1996), Chang

et al. (2004), Grable and Lytton (1998),
Hawley and Fujii (1993), Sung and Hanna
(1996), Wang and Hanna (1997)
Positive relationship or U-shaped pattern Chang et al. (2004), Hariharan et al.(2000),
Morin and Suarez (1983)
Positive relationships Grable (2000)
Gender Males are more risk tolerant than females Bajtelsmit and Bernasek (1996), Hawley
and Fujii (1993), Sung and Hanna (1996)
Gender and marital status Sung and Hanna (1996)
Occupation Type of occupation (being a professional or Chen and DeVaney (2002), Grable and
a self-employed) Lytton (1998), Grey and Gordon (1978),
Haliassos and Bertaut (1995), Leonard
(1995), Lee and Hanna (1995), Masters
(1989), Meyer et al. (1961), Quattlebaum
(1988), Sung and Hanna (1996)
Marital status and child dependencies Being single increases RT Baker and Haslem (1974), Lazzarone
(1996), Roszkowski et al. (1993), Sung and
Hanna (1996)
Size of household (mixed findings) Grable and Joo (1999), Sung and Hanna
(1996)
Changes in family structure affect risk Chaulk et al. (2003), Tversky and
tolerance Kahneman (1974, 1992)
Ethnicity White non-Hispanic households tend to be Chang et al. (2004)
more risk tolerant than Hispanics
FINANCIAL RISK TOLERANCE: WHERE DOES IT ALL START FROM?
(continued)
21
22
Table 1 (continued)
Hispanics are more risk tolerant than Grable and Joo (1999)
non-Hispanics
Ethnic differences have no effect on risk Gutter et al. (1999), Sung and Hanna
taking (1996)
Personal characteristics Bernheim (1998)
Portfolio composition and RT Hariharan et al. (2000)
C. CRUCIANI ET AL.
Financial education Positive relation with RT Chang et al. (2004), Hawley and Fujii
(1993), Lee and Hanna (1995), Sung and
Hanna (1996), Warner and Cramer (1995)
Financial literacy Positive relationship with RT Bakken (1967), Cartwright (2004), Chen
and Volpe (1998), Fox et al. (2005),
Howells (2005), Langrehr (1979), Mandell
(1997)
Income and wealth Higher income determines higher RT Baker and Haslem (1974), Chen and Hanna
(1996), Cicchetti and Dubin (1994), Cohn
et al. (1975), Grable and Joo (1999),
Hanna and Chen (1995), Lee and Hanna
(1991), Malkiel (1996), Masters (1992),
Schooley and Worden (1996), Shaw (1996),
Zhong and Xiao (1995)
Retirement Years until retirement Sung and Hanna (1996)
Personality psychology Sensation seeking and Type A behavior Carducci and Wong (1998), Carver et al.
1
pattern (1976), Friedman and Rosenman (1974),

Haynes and Matthews (1988), Houston and
Synder (1988), Howard et al. (1977),
Lovallo et al. (1986), Matthews and Siegel
(1983), Mettlin (1976), Sorenson et al.
(1987), Strube (1991), Thoresen and Low
(1990), Van Egeren et al. (1982), Weidner
and Matthews (1978), Wong and Carducci
(1991), Zuckerman (1983), Zuckerman
et al. (1978)
FINANCIAL RISK TOLERANCE: WHERE DOES IT ALL START FROM?
23
theory, but also the risk-return framework typical of finance is used, while
decision theory and psychology focus also on psychometric scales (Betz
et al., 2002). The different approaches have different focuses but overall
managed to establish a series of important results to build upon in the
following decades. The following sections will try to provide an orga-
nized overview of the different tools put forward before the advent of
the MiFID and discuss the approach and the merits of each of them. As
the review will show, elicitation methods matter: the way in which risk
preferences are assessed may lead to different results.
This section will discuss the merits and limitations of the key categories
of tools used to measure financial risk tolerance, focusing on whether
the measures tend to be purely descriptive or if they somehow advance
knowledge in understanding the process of risk aversion in this domain.
2.3.1 Choice Dilemmas

Such tools present individuals with a series of choices framed in risky
scenarios conditions and use decisions to infer risk preferences. The
validity of the constructs used to define the choice dilemmas determines
their ability to accurately measure risk aversion. Choice dilemmas were
very popular in the 1970s, but their results are not stable. For instance,
Cartwright (1971) finds that allowing for group discussion changes the
risk assessment of such scales, and (Grable & Lytton, 1999) suggest their
popularity has diminished due to the one-dimensionality of the risk ques-
tions. This type of approach focuses strictly on revealed behavior and does
not control for the perception of benefits and risks associated with the
different scenarios presented.
2.3.2 Expected-Utility-Based Tools

Utility theory tools are based on specific models of decisions under uncer-
tainty that allows determining how risk aversion should be measured.
Consider for instance the Expected utility Theory model, which uses
a well-behaved utility function to determine individual attitudes toward
risk. Given the shape of the utility function and gambles over the real
space a risk averse individual would always find the expected value of
playing a random gamble to be preferred to the random gamble itself.
Using this notion, individual choices can be observed, risk profiles clearly
classified, and the shape of the utility function determined with clarity
for everyone. Moreover, the observation of individual choices would
explain why people choose differently: e.g., a risk averse individual would
prefer a much smaller certainty equivalent than a risk-neutral person

not to play a gamble. The first problem with such a theory is that
according to the method used to measure utility (in certainty-equivalent
or in probability-equivalent ways) individuals tend to be classified differ-
ently (Slovic, 1964). The well-known phenomenon of preference reversal
shows the dramatic implications of procedure variance (Tversky et al.,
1990): when choosing between a large probability of winning a small
sum (H-bet) or a small probability of winning a large sum (L-bet), most
people prefer the former. When asked to state their lowest selling price
for the two lotteries, the L-bet is marked higher than the H-bet. The
inconsistent patterns emerging from different methodologies to assess risk
profiles within the expected utility framework have been the subject of
several empirical analyses both in economics and psychology and it would
be beyond the scope of this paper to review them in full. Nevertheless,
it is important to point out that systematic deviations in empirical studies
fueled the development of alternative models of decision-making such as
the previously mentioned prospect theory, which, among its many other
key contributions, established the existence of a change in risk profile
between the domain of gains and of losses. The fact that risk prefer-
ences are not stable within the same individual and using a common
medium (monetary gains or losses) reduces the viability of expected-
utility-theory-based tools to determine risk tolerance, although it has the
merits of trying to discuss the process of risk evaluation. The economic
literature, especially the experimental one, has proceeded to couple tradi-
tional revealed-preference approaches with belief-elicitation procedures
to assess directly unobservable attitudes (for a review see [Schotter &
Trevino, 2014]). Reviewing this literature is beyond the scope of this
book, although it is important to note that the effectiveness of such tech-
niques in eliciting true beliefs is still discussed (see for example [Danz
et al., 2022]).
A similar approach trying to use formal frameworks to derive financial
risk tolerance is the risk-return framework. A prominent feature of this
approach is that it allows modeling the process behind risk aversion by
using the basic framework used in finance to trade off expected benefits
with risk, commonly measured with an asset’s variance in finance. Moving
to psychological risk-return models allows us to assume that perceived risk
instead of variance determines the riskiness of the underlying asset, and
to allow it to vary across contexts. The introduction of perceived risk
allows reconciling some of the apparently inconsistent choices observed

for instance in choosing prospects across gains and losses as observed in
prospect theory.
2.3.3 Objective Measures

These measures are based on actual holdings of stocks or other risky
assets in individual portfolios; the larger the share of stocks, the higher
the tolerance for risk. There are several issues with this procedure: on
one side, it assumes that the proportion of stocks in the individual port-
folio actually and correctly represents the individual risk aversion and
is not mediated by third parties. Moreover, and more importantly, it
assumes that portfolio composition is a perfectly rational act (Grable &
Lytton, 1999). Empirical evidence from behavioral finance shows that
portfolio composition is unlikely a purely rational act: even as markets
become more and more interconnected investors tend to select stocks
prevalently from their own country (French & Poterba, 1991), and this
home-bias phenomenon is true even when considering the choices of
mutual fund managers (Coval & Moskowitz, 1999). Even if some indi-
viduals do not rely on financial advisors or third parties, the existence
of strong behavioral biases in investing prevents the mere observation of
the share invested in stocks in their portfolios from providing a full and
clear picture of risk tolerance, making these tools descriptive rather than
predictive and not able to understand the process behind risk aversion.
Moreover, focusing on choices made these measures cannot account for
risk perceptions, and thus do not go from conventional risk tolerance to
perceived-risk tolerance.
The Health and Retirement Survey4 in the United States collects infor-
mation about the investment composition of respondents (e.g. amount
allocated in stocks) and allows to derive an objective measure of financial
risk tolerance that has often been used in empirical analysis in combination
with many other health-related and attitudinal variables collected.
2.3.4 Heuristic Methods

This method is reportedly used by finance professionals and is based
on the empirical findings linking socio-economic characteristics and
observed risk tolerance (Grable & Lytton, 1999). A key problem is
4 The questionnaire documentation is available at this link https://hrs.isr.umich.edu/

documentation/questionnaires.
that the theoretical literature up to the mid-1990s seemed unable to

describe accurately the relationship between risk aversion and some socio-
economic features, such as age where different theoretical models predict
different (increasing and decreasing) relationships between aging and
taking risks (Yoo, 1994). The applicability of such heuristic models thus
lies in exploring further the likely non-linear relationship between indi-
vidual characteristics and risk (Grable & Lytton, 1998) rather than being
able to shed light on the risky decision-making process per se.
2.3.5 Self-Reported/Subjective Risk Measures

Subjective measures of financial risk have been collected in large-scale
survey of consumers and investors across the world. Popular choices
include the Survey of Consumer Finance (SCF) for the United States,
the German Socio Demographic Panel (SOEP) and the Survey on
Health, Aging and Retirement in Europe (SHARE), whose subjective risk
questions are included in Table 2.
One prominent advantage of relying on such measure is that these
surveys are conducted over long time intervals over representative samples
of the population, allowing for large-scale studies with meaningful impli-
cations. On the other hand, self-reported survey answers are not incentive
compatible, thus forego some of the advantages of performance-based
incentivization that other forms of individual assessment have (Camerer &
Hogarth, 1999) to improve performance in economic experiments.
Nevertheless, empirical research lends support to the fact that self-
reported measures are reliable in assessing risk attitudes. Dohmen et al.
(2011) explored whether subjective measure positively relates to more
objective ways to elicit financial risk tolerance finding and finds that
self-reported risk attitudes correctly predict risky choices in a real-stakes
lottery experiment, confirming the validity of survey-based measures.
Hallahan et al. (2004) compare the risk tolerance emerging from a more
complex Risk Tolerance Scale comprising 25 items and self-reported
assessments and find that the two measures are generally in agreement:
this confirms that how people feel about risk and how they act upon it
seem to be two connected processes.
2.3.6 Risk-Behavior Scales

Another popular choice is the use of more complex financial risk tolerance
scales. Scale are composite tools that allow to consider the multifaceted
nature of financial risk tolerance instead of relying on only one dimension.
Table 2 Subjective measures of financial risk tolerance from large-scale repre-

sentative surveys
Survey of consumer finance German socio demographic Survey on health, aging

(SCF) panel (SOEP) and retirement in Europe
(SHARE)
Which of the following Indicate on a scale from 0 When people invest their
statements comes closest to to 10 how you see yourself savings they can choose
describing the amount of in terms of your willingness between assets that give
financial risk that you are to take risks, with 0 low return with little risk
willing to take with your representing no tolerance to lose money, for instance
spare cash? That is, cash for risks and 10 a bank account or a safe
used for savings or representing the greatest bond, or assets with a high
investment willingness to be exposed to return but also a higher
Participants can choose risk risk of losing, for instance
from the following stocks and shares. Which
responses (emphasis not of the statements on the
added) card comes closest to the
1. I take substantial amount of financial risk
financial risks expecting to that you are willing to take
earn substantial returns. when you save or make
2. I take above-average investments?
financial risks expecting to 1. Take substantial financial
earn above-average returns. risks expecting to earn
3. I take average financial substantial returns
risks expecting to earn 2. Take above-average
average returns. financial risks expecting to
4. I am not willing to take earn above-average returns
any financial risks. 3. Take average financial
5. I never have any spare risks expecting to earn
cash. average returns
In the waves used in this 4. Not willing to take any
study, people who choose financial risks.
option 5 are given the
following follow-up
question
Assume you had some spare
cash that could be used for
savings or investment.
Which of the following
statements comes closest to
describing the amount of
financial risk that you
would be willing to take
with this money?
They are then asked to
choose from 1 to 4 above
Grable and Lytton (1999) highlight the key features of a valid and reliable
measure of risk tolerance including specific dimensions of risk like the
probability and size of gains and loss, the need to focus specifically on the
financial domain and the trade-off between length and clarity. In the paper
they introduce the Grable and Lytton risk tolerance scale and discuss how
the 13-item tool was developed and validated.
Box 1.1 the Practioner View

In this box, Giuseppe Amitrano (WieldMore Investment Management)
draws a picture of the financial markets in the pre-MiFID era, tackling
the open issues discussed in this chapter
Did the booming market opportunities and the need to engage more
people in financial markets justify the lack of formality regarding
risk tolerance? Which rules existed? Was compliance (to what?) a key
driver?
The booming performance of the market and a wider participation of
investors in terms of age and wealth distributions only begun at the
beginning of the 90s both in the U.S. and in Europe.
The historical series of the distribution of household wealth in the
U.S. since 1989 shows that wealth was almost equally distributed between
above and below 55 years of age ($11.13tn versus $9.29tn, respectively),
a completely different situation with respect to nowadays, where the same
distribution between over and under 55 years of age ($96.7tn versus
$45.4tn) basically sees younger generations halving their participation
to general wealth (Source: Board of Governors of the Federal Reserve
System). The high wealth available for the working population in the
90s was favored, among other things, by the large increase in real estate
value and the low-interest rates. The investors who fostered the necessary
regulatory changes and modelled the current market environment are the
same who experienced the ride from those days to today. The formality
that followed regarding data transparency, suitability, and risk tolerance has
been very helpful to develop market liquidity and confidence but has been
also instrumental to secure those legacy positions.
During the 90s the existing rules were essentially the corporate laws
and standard governance codes of conduct. They have been the first and
most important sources of investors’ protections for all financial institu-
tions, as they were specified by the legal system. The use of contract laws
provided the fundamentals of compliance for all deals, privately negotiated
but also publicly arranged. All aspects of the company life, from founda-
tion to bankruptcy, and to securities dealing were at the time regulated by
laws affecting the right of both insiders and outside corporate investors.
Therefore, the good functioning of the markets and the protection of
investors developed at the same time with the capability of the different
regulators and courts to guarantee and, if necessary, enforce these laws.
The protection of corporate investors became the first step to create the
confidence for attracting investments, and through financing companies,
creating a well-functioning financial market.
Limits and checks have always been a characterizing trait of financial
firms. The role of compliance has been more of a gatekeeper rather than
a driver, but the concept that there was a defined area of operation and
amount of risk-taking has always been present. However, in the very early
days of modern financial markets, during the end of the 80s, the role
of compliance was less relevant, in the sense that operativity was more
flexible and implied less bureaucracy. Compared to nowadays, there was
a more limited control from the regulators, performing less checks which
created room for irresponsible management behavior (like MF, LTCM,
and Lehman).
Was there a perception that investors were to be protected from or
rather encouraged to take on risk? Based on what?
One of the main provisions in terms of investor protection was that
investment firms must match the client’s investment profile with suitable
products. Today, the idea of suitability itself is to find a product and an
overall portfolio that is tailored for the client himself/herself, like a suit.
That means it should not push investors to take risks they are not able to
bear. On the other hand, it is important that regulation does not create
barriers where they are not needed, because that would imply a cost-
opportunity situation. The core idea that led to the MiFID was to increase
transparency to deliver the perfect suit for the client. Nevertheless, the
bumpy rides financial markets faced during the early years probably moved
the industry to look at risk through a more conservative lens, from a regu-
latory point of view. This resulted in the provision of a target market and
compatible customers from the very beginning of the product life cycle.
3 Conclusions and Roadmap of the Book

The goal of this chapter was to set the stage for the remaining of the
book. The major trends in financial markets characterizing the Eighties,
Nineties, and early 2000 have been described, with the diffusion of the
mutual funds’ industry and, at the same time, the concern of governments
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"Can't stand them. I went to hear Lohengrin once, and came out
before the last act. I leave out Aida now, too. The good old-timers
suit me, old Trovatore and Martha, and some of the new ones aren't
bad, the ones with catchy music."
"You didn't like Aida?" Gwen fairly groaned.
"Bored me to death. Could hardly sit through it. I wouldn't have, only
the ladies I was with appeared to like it, so I stayed on their
account."
Gwen made no comment but opened the book she had brought, a
copy of Kipling. She had considered his masculine taste in making
the selection. "Now I'll read you my favorite 'Bell Buoy' right here
where we can get the sound of one. 'White Horses' is really my
favorite, but it is not in this volume. I'll read first and then you can
pick out something to read to me."
She opened the book and proceeded to read. Her listener sat with
hands behind his head and Gwen hoped he was impressed, for she
read well. "What do you think of it?" she asked as she closed the
book.
"Well, I can't make out exactly what he's driving at. I'm not a great
one for poetry. Once in a while you come across some rattling good
thing like 'Hans Breitmann's Party,' something that makes you laugh.
I don't mind that sort of poetry."
Gwen slipped the book behind her. "What do you like to read, Mr.
Mitchell?"
"Oh, I don't have much time to do more than run through the
newspapers, or a magazine sometimes when I'm on a train."
"But I thought all Bostonians were very intellectual." There was
disappointment in Gwen's tones at discovery of his especial taste in
literature. She had thought he might declare himself for history, at
least.
"Well, I suppose a good many Boston folks are intellectual. I don't
profess to be. Life's too short to spend over books. I enjoy this free
life," he stretched out his arms bared to the shoulders, "and I like
tennis and golf and that sort of thing, for exercise. I enjoy a nice light
opera with a lot of pretty girls in the chorus, or a good play, not too
tragic a one. I'm pretty fond of a horse and a boat. I shall have a
yacht up here next year, I think."
"A yacht would be lovely," said Gwen brightening. "You could go
cruising all around among the islands."
"Yes, and up the coast to Bar Harbor. Yes, a yacht would be jolly
good fun."
"Shall you be glad to get back to the city, or do you feel as if you
would like to stay up here forever living the free life?" queried Gwen.
"Not forever. Nobody would care to do that who'd ever lived in a city,
unless it were some queer freak like Mr. Williams."
"Don't call him a freak." Gwen spoke with some asperity.
"Well, he's an oddity, at least. I can't make him out. To be sure I don't
know him very well, but it strikes me as queer that a man should
want to live on this island. It's all very well for a summer holiday, but
in winter, no, thank you. Yes, I shall be glad to get back, to see the
fellows at the club, and to put on a different sort of rig from this. It
won't be bad to see the inside of a theatre, either, and go to a first-
class dinner, or a German."
Gwen smiled. She did not despise these things herself. "One looks
at life very differently in the city, doesn't one?" she remarked.
"Yes, there's the fun of it. When I do a thing I want to do it thoroughly.
When I'm at home I do as my neighbors do; when I am here I try to
follow the example of those around me."
"Sensible man! So we will not read any more. Come, let's go around
to the other side, and see what it looks like. We'd better not go back
through the woods, for after the sun goes down it gets pretty dark
and spooky in there, so we will go back by the road."
"You're not afraid? Not when I'm with you?" He spoke tenderly, and
more than ever Gwen declared for the road.
"Not afraid," she said, "but it takes longer, and I don't want to miss
my supper, nor do I want you to miss yours."
"A good substantial reason," returned Mr. Mitchell approvingly. "I
hope it will be a pleasant day to-morrow." He looked at the sky. "Are
you a good weather prophet, Miss Whitridge?"
"Not very, though I should say it would be warm. To-day is warmer
than any we have had for a long time. Any special reason to be
curious about the weather, Mr. Mitchell?"
"I promised Miss Fuller I'd row her over to Jagged Island. It's an
engagement of long standing, you know, and the time is getting
short."
"I remember you promised long ago. Shall you go fishing?"
"Perhaps we shall try our hands at it."
"Cap'n Ben says that the steamboats and launches are beginning to
scarcen the mackerel and that they are not so plentiful this year as
usual."
"Scarcen is a good word."
"So I think. I shall adopt it from henceforth. Cap'n 'Lias Hooper's
vessel, the Mary Lizzie, sails to-morrow," remarked Gwen casually,
"so yours will not be the only fishing expedition that goes out."
The sun was setting in a mass of rolling clouds. The air soft and
warm, even as it blew over stretches of water, was of a more
languorous quality than usual. The waves stole in gently, lapping the
stones with a placid murmur. The cove was as smooth as glass,
except where a boat, manned by two rowers, left a brilliant line of
ripples in its wake. The floors of the great chasms indenting the
shores, displayed long ropes of maroon-colored kelp where the tide
had gone out. The main land, beginning at the Neck, stretched its
curving fingers out into the quiet sea as if it would clutch the islands
beyond and draw them into safe keeping against a time when great
breakers should threaten them. Gwen and her companion stood
watching the sky till the sun disappeared behind the piled-up clouds,
which, showing golden edges, drifted off towards the horizon, finally
hiding the distant mountains from view. Retracing their steps the
man and maid went on down hill toward the road, and further to
where they must skirt Little Harbor. Just at this point Gwen gave a
quick glance toward a cottage close to the cove shore, and on the
porch caught sight of a man standing, with folded arms, looking out
upon the water. She gave a gentle sigh as she went through the little
gate on the opposite side of the way.
The next morning was balmy and still, only a slight breeze filled the
sails of Captain Hooker's fishing schooner which passed out of the
cove. Gwen standing on the rocks, watched it slipping slowly by.
Some one on the vessel blew a long blast upon a horn, and
presently, further on, a group of women gathered to watch the vessel
out of sight, and to wave farewell to those on board. In the group
Gwen distinguished Almira Green and Ora. She remembered that
Manny was going out to the Banks that day with the other fishermen.
"Poor little Ora!" said the girl to herself. "And poor Almira, too," she
added. "I am glad to have no lover who must follow the high seas."
She watched the vessel grow smaller and smaller, and presently her
attention was attracted to a smaller craft, a little row-boat moving
steadily toward Jagged Island. "I believe there are Ethel and Mr.
Mitchell!" she exclaimed. "Joy go with you, my dears! I am absolutely
convinced that I could not stand a man who preferred comic operas
to 'Aida,' and who had no soul above newspapers. You are quite
welcome, Ethel dear. I hope you are prepared with plenty of bait, and
will land your beautiful gold fish." She made a deep curtsey and
laughed. "I am sure he is just about as bony and unpalatable as any
other gold fish would be to me," she said to herself.
She turned her eyes from the small boat to another which had just
rounded the point, and was making toward one of the inner islands.
She looked at it attentively for a moment, then sprang over the rocks
toward the cottage, coming out directly with a pair of field glasses. "I
thought so," she murmured. "Everybody is going out to-day, it
appears. I was sure that was Cap'n Ben's boat. I wonder if he is
going off sketching. He is all alone." The "he" could scarcely apply to
Cap'n Ben. "He is sailing off toward Pond Island. He isn't going
there, I know; I suppose to some point further on. That's the third
boat to go out from here this morning. Dear me! I wonder what I shall
do to-day. It seems a wee bit lonely on the island. Bother! there
comes Miss Henrietta, skipping over the rocks like a hart upon the
mountains. I can't pretend not to see her."
Miss Henrietta, the youngest of the Gray sisters, had arrived at that
uncertain period of life when she hesitated to associate with women
older than herself for fear she might be supposed of the same age.
She, therefore, sought the society of those much younger, hoping to
be accredited with a like youthfulness. Gwen usually tried to avoid
her, not because she did not enjoy older companions, but because,
as she said, Miss Henrietta was the kind who took in at one glance
what you had on, and criticized it afterward. She was always very
ready with suggestion. "You would think," said Gwen to her aunt,
"that Miss Henrietta had a copyright on all possible suggestions, she
is so ready to make them and acts as if you had infringed her rights if
ever you present one of your own to her." To each other Ethel and
Gwen always spoke of Miss Henrietta as "Household Hints." So just
now, Gwen, waiting for Miss Henrietta to come up, knew a
suggestion would be ready, and so it was.
"I just thought I'd run over and tell you," said the elder lady, "that I
find tennis shoes injurious, and I suggest that you don't wear them."
"I haven't found them so," returned Gwen.
"But you will," insisted Miss Henrietta.
"I'll wait till I do," said Gwen a little shortly, but with a smile. "Were
you coming to Wits' End, Miss Henrietta?"
"No, I saw you out here and I thought I'd join you. One tires of one's
elders constantly, don't you think?"
"I never tire of Aunt Cam," replied Gwen, "and we see more of one
another at Wits' End than we do in the city."
"Couldn't you find a prettier name for your cottage?" asked Miss
Henrietta. "Why not call it Rock Rest, or something like that?"
"We don't want to be commonplace, and Wits' End just suits us."
"I see your friend Miss Fuller has gone off with our young man," said
Miss Henrietta, ignoring Gwen's reply. "She is quite a handsome girl.
What do you think of her character, Gwen? I wish some one would
tell her that a red jersey is not becoming."
"I think it is becoming." Gwen set aside the question.
"Oh, never, my dear, never. I don't see how you can think so. Then
she has such a fad for mushrooms; she is forever looking for them.
How she can like such things I cannot see.
"Dear me!" Gwen shook her head. "It is sad that one so young
should have such depraved tastes."
Miss Henrietta looked offended. "I see you are bound to disagree
with me," she said tartly. "By the way, why didn't you go to Jagged
Island with your friends?"
"Perhaps because I didn't want to, and perhaps for other reasons,"
returned Gwen noncommittally.
"Do you think it was quite the thing for them to go off alone in that
way? I am afraid your friend isn't very particular about the
proprieties."
"Why didn't you go, Miss Henrietta?"
"I had other things to do," said she bridling.
"For pity's sake go along and do them," rose to Gwen's lips, but she
said only, "I think we all have plenty to do up here, and that reminds
me I must finish a letter before I go for the mail. As Mr. Mitchell is
away to-day, perhaps you would like me to bring yours, too."
"Oh, if you will." The offer was smilingly accepted, and Gwen
returned to the cottage, leaving Miss Henrietta ready to swoop down
upon the Hardy girls who were coming along the rocks.
"What's the matter?" asked Miss Elliott as Gwen threw herself into a
chair. "You look as if some one had been rubbing you the wrong
way."
"Some one has been. I met Miss Henrietta out on the rocks just now.
She is so picky and so ready to condemn fads and fancies in others
when she is full of them herself. She asked me why I wore tennis
shoes; she found fault with Ethel for wearing red, and for liking to
hunt for mushrooms. She asked me what I thought of Ethel's
character, too. What business is it of hers what I think?"
"She was probably trying to find out if Ethel would make a suitable
wife for your millionaire, Gwen," Miss Elliott said laughing.
"My millionaire? I could never marry a man who reads only
newspapers, who can't appreciate good music, and doesn't know a
poor picture from a fine one."
"If those are your only objections, they don't seem very weighty
ones. He probably reads only newspapers because he is too busy a
man for anything else, and as for the other things, it may be only a
lack of opportunity for studying the best. He may be a very fine man
who would make an estimable husband, and yet not be a
connoisseur in art or music."
"Oh, dear, why is it that the men who would make estimable
husbands must so often be unattractive? I am afraid it isn't lack of
opportunity that's the matter with Cephas. It lies deeper than that.
But his deficiencies will never bother Ethel, so she shall have him. I
think they will suit one another admirably. Are you disappointed, Aunt
Cam, that you must forego his nephewly embraces, and that he is
not to call you 'my dear aunt'?"
"Nonsense, Gwen, of course not. I don't care a rap for him in any
capacity."
"But you think he will suit Ethel. You don't exactly approve of Ethel, I
am afraid."
"Not altogether. I like her. She is very agreeable, and even brilliant,
sometimes. She seems to be a person who has many engaging
charms but few sterling qualities. She has not a spiritualizing effect
upon one, and I am afraid her standards are decidedly of a material
order. I can fancy her quite satisfied without the ennobling things of
life."
"She has a sweet disposition, and she has beautiful theories," said
Gwen thoughtfully.
"But does she practise them?"
"Not when it is inconvenient. I am afraid she is rather a brilliant
butterfly, but she is vastly entertaining."
"What has become of your artist friend?" asked Miss Elliott suddenly.
Gwen immediately became very busy rearranging the pillow on the
divan. "Oh, he's around," she said with apparent indifference. "You
know his sister and the children have gone off for some weeks, so of
course I see nothing of them. I saw him yesterday out sketching. To-
day he has gone somewhere in a boat. Everyone has gone off in a
boat. Ethel and Mr. Mitchell are on their way to Jagged Island,
Manny Green is off for the Banks, and Mr. Hilary has gone up along
to some unknown spot. I am quite desolate without my playmates. I
think I shall have to hunt up Daddy Lu."
But Luther Williams had gone to his favorite haunt in Middle Bay,
Gwen discovered, for no one had seen him since morning. So the
girl returned to the house and busied herself with unimportant things
till it was time for the afternoon's mail. "I'll stop in to see Miss
Phosie," she said as she passed out, "so don't expect me right back,
Aunt Cam." She looked across to Jagged Island wondering if the two
who had rowed over that morning had yet returned. She looked
toward the north to see if Cap'n Ben's little boat were on its way
back, but except for a motor boat chugging along and some white
sails far off there were no vessels visible. So she turned toward the
cove and was soon in Miss Phosie's bright kitchen.
CHAPTER XIV
"THE CLOUDS YE SO MUCH DREAD"
Only Miss Phosie was at home, but she gave a smiling welcome to
her guest. "I see Ora has come back," said Gwen by way of opening
the conversation.
"Yes, she wanted to see Cap'n Hooper's vessel off, I s'pose. Anyway
she wasn't content to stay any longer."
"And Manny has really gone."
Miss Phosie nodded. "I'm happy to say he has. Maybe Ora'll take an
interest in something and somebody else, now. I was hoping she'd
feel inclined to stay at Bangor with her cousins, but here she was
back at the end of a week, and all the difference I can see is, she's
got a bigger lot of hair piled up over her forehead and a gayer hat."
Gwen smiled. She knew Miss Phosie must be more than usually
ruffled to criticize in such a manner. "Perhaps if she were to go away
to school she might forget about the boys here. She is too young to
have her head full of such things." Gwen spoke as one of vast
experience.
"That's what I told her grandpap," returned Miss Phosie, "but he can't
bear to think of her going away for as long as a whole winter. She's
his only grandchild, and he does set such store by her. Won't you
come into the settin'-room, Miss Whitridge, where sister is?"
"If you don't mind my staying here, I'd rather sit with you."
Miss Phosie looked pleased. "Well, that'll be nice," she said. "Two of
our boarders has left, and there ain't quite so much to do. The others
will be going before long, too, and then we can settle down to the old
ways."
"Dear me, when you talk about boarders leaving it makes me feel as
if the summer were nearly over," returned Gwen.
"But you cal'late to stay pretty late, don't you?"
"As late in October as we dare. I must be back by the twentieth."
"Then I hope we shall see more of you," replied Miss Phosie politely.
"Mr. Williams was saying the other day that after the boarders go we
always take more comfort in the cottagers. Them that come and go
just for one season you never feel much acquainted with, but with
them that owns property it's different. They belong here."
"We certainly feel as if we did," Gwen assured her. "I love every inch
of the island."
"That's what Mr. Williams says, and I guess that's why you and him
are such friends. He's real fond of it."
"Where is he to-day?"
"He's gone off in his boat alone. He likes to do that once in a while
and nobody asks him why or wherefore."
"You are very good to him, Miss Phosie. I think it is wonderful that he
should have found such a home here, when he just drifted in,
absolutely unknown, and seems to belong to no one."
"We cal'late he's been long enough in this house to belong to us,"
said Miss Phosie a little defiantly.
"Indeed I am sure he feels so. He has often told me that no sister
could do more than you for him. I know what it must mean to him for
I have very few relatives myself."
"That so?"
"Aunt Cam is my nearest and dearest. I have some distant cousins,
but that is all. I feel almost as if Mr. Williams were a relative. He has
been so kind to us."
"That's his way, though I must say you are the first of the newcomers
that he's taken any fancy to. He don't make much fuss about what he
does, but little things count, Miss Whitridge."
"They surely do. Did he look just as he does now when he first came
here, Miss Phosie?"
"Just about. He always wore his beard that way, close-cropped, and
a short mustache. He must have been considerable over thirty when
he came."
"And he just appeared that way, suddenly?"
Miss Phosie nodded. "Came over on a sailing vessel from the Neck.
There wasn't any steamboat then. Said he'd like a few days' fishing.
Had a grip-sack, but no other baggage. Father took him out, and
liked him from the first, though he was always very quiet and
reserved. Never had any family photographs about or nothing of that
kind, just a little old Bible with his initials on the back. I've looked at
it," Miss Phosie confessed, "but there's nothing on the inside page,
but 'To my little son from Mother.' We've never tried to pry into his
affairs. We didn't feel it would be friendly. He's a nice good man,
father says, and that's all we want to know."
Gwen felt herself properly reproved, and concluded it would be
better to change the subject. "How dark it is getting," she remarked,
"and I do believe that is thunder." She arose and went to the window.
Great masses of heavy clouds were overspreading the sky. The sea
was inky black, though along the horizon shone a line of silver. "Dear
me," exclaimed the girl, "there is a gust coming up, or, I should say, it
has arrived," for, as she spoke, the rain began to fall in big drops,
and a strong wind sent chips and leaves scudding across the grass.
"Land sakes! so it has," returned Miss Phosie, "and Mr. Williams is
out in it. I hope he won't attempt to cross."
"I am afraid Ethel and Mr. Mitchell are out in it, too."
"You don't say! When did they go?"
"They started for Jagged Island this morning. They rowed over.
There are—others out, too. Oh, I do hope they are all safe." A heavy
peal of thunder startled them, and vivid lightning cleaved the dense
clouds overhanging the island.
Ora, pale and frightened, rushed into the kitchen. "Oh, Aunt Phosie,"
she cried, "it's a dreadful storm, and the Mary Lizzie is out in it." She
burst into tears.
"There, child, there," said Miss Phosie soothingly. "Don't you be a
mite afraid about the Mary Lizzie. Her cap'n's weathered more than
one gale. It's the little boats that's in danger, not the big ones. Here's
Miss Whitridge has friends out, and she's not crying. You an island
girl, too."
"There's no one she loves that's in danger," sobbed Ora.
Gwen shuddered, and kept her eyes fixed upon the storm-swept sky.
It was a marvellously grand one. The centre of the storm seemed
directly overhead, where lightnings flashed and thunders rolled from
clouds of intense blackness. These grew in gradation of tone less
and less dense toward the edges where they dropped a wonderful
fringe over the brilliant silver which bordered the visible circle of the
earth. Upon the jagged sides of the dark and forbidding rocks leaped
angry, white-capped waves which rushed in from a sea as black as
the sky, only farther out within the line of dazzling silver shone fair
green islands, brilliant as emeralds upon the gleaming band.
"I must go out, and get a better view of it," said Gwen catching up
her cape.
"But it hasn't stopped raining," Miss Phosie warned her.
"It isn't pouring so hard, and it is such a marvellous sight. I don't care
if I do get wet. Besides, perhaps I can see if my friends are out."
"They'd have a pretty hard time in a little boat, in such weather," said
Miss Phosie, and Ora began to cry again. She turned her wet eyes
upon Gwen.
"May I go with you?" she asked meekly.
"Why, certainly," responded Gwen cordially. And in spite of Miss
Phosie's protestations they fared forth, across the wet grass, and on
to the rocks. The storm was passing over, and more gems of islands
were visible. The bordering band of silver widened. The black fringe
swept further and further across the land, and presently the sun
broke forth, though the angry waves still buffeted the passive rocks.
The two girls said not a word till they stood side by side on the cliff,
then Ora's eyes sought the distant horizon, while Gwen turned her
gaze northward. There was not a sail, not a dot, indicating a boat
upon the ruffled surface of the water.
"I hope, I hope everyone is safe," said Gwen breaking the silence. "It
was such a sudden sharp storm, but it was soon over. It seems to be
passing to the north. I don't believe it has gone out to sea at all, Ora,
and the Mary Lizzie is probably away beyond it."
"It's dreadful to be so frightened," responded Ora faintly. "I was
always afraid of thunder-storms, and when you have friends out you
are more afraid than ever."
"Yes, you are; I realize that." Gwen took Ora's hand and held it in a
warm clasp under the shelter of her cloak.
"They don't understand," said Ora responding to this sympathy.
"Nobody knows what I feel, for I sent him. I wanted him to go so as
to show everybody there was something in him."
Gwen gave the hand a little squeeze. "I can understand, Ora," she
said. "I know just how you feel. It is dreadful to say things that send a
friend away from you. I have done it, and I know."
Ora, in turn, gave the fingers that held hers a little pressure. The
child in her distress felt the need of a confidant. She wanted
sympathy and advice from some one young like herself, but some
one whose experience had given her judgment.
"Do you think," Gwen went on, still looking northward, "that anyone
would be liable to get so far out before the storm came up, that he
couldn't make a harbor?"
"He might," returned Ora doubtfully.
"But even if he were swamped, the boat would float, and the oars; he
could save himself."
"If he could swim, or he might even hold on and float, only there are
these cruel rocks."
"Ah me!" Gwen groaned. "Suppose he—they did start out, and could
not get back. I should never forgive myself."
"For what, Miss Gwen? Did you persuade them to go? Is it Mr.
Mitchell and Miss Fuller you mean?"
"Of course," replied Gwen hastily. "I suppose there is no use
standing here watching, and anyone starting now would be quite
safe, though it would be hard pulling. Ah, there's Mr. Williams! One
at least of our friends is safe. That argues well for the others."
Luther Williams in his sou'wester came up to them. "Miss Phosie told
me I should find you here," he said.
Gwen held out both hands. "I am so glad you are safe," she cried.
"Were you caught in the storm?"
"I was nearly home," he told her, "just coming into the cove, so I put
in there by Jo Thompson's, took shelter in his house, and walked
home from there."
"I hope every one else is as well off. Mr. Mitchell and Miss Fuller
started for Jagged Island this morning. They haven't come back, and
I see no signs of them."
"They're waiting for the sea to smooth down, I suppose. It will after a
while. It was a sharp blow while it lasted, but the wind is back in the
same old quarter, and they'll probably be coming along pretty soon.
Cap'n Ben's boat is out," he added abruptly.
"I know it, oh, I know it," Gwen whispered. "Dear Daddy Lu, can't you
do something?"
He patted her shoulder encouragingly. "I'll go up along, and see what
can be discovered. I shouldn't be surprised if he had put into Water
Cove, if he left Dorr's at all. He was going there sketching to-day,
and thought it would be handier to take his traps in a boat than to lug
them."
Gwen drew a sigh of relief. "It is a good thing to have met you. Have
you seen him lately?"
"Last evening."
"He seemed well?" The question was asked wistfully.
"Yes." It was not like Mr. Williams to do more than give the laconic
reply.
"Ora has been worrying, too," Gwen said in a low voice.
"She has no reason to."
"You are sure the storm went around."
"Yes, though they may get it out at sea later on."
"I will tell her you said there was no cause for worry." She turned to
the girl who stood a little way off. "They are getting the storm over
Bath way, Ora," she said. "We needn't be alarmed."
Ora turned a brighter face toward the girl. "I've been watching it," she
said. "I'm going to see Almira now. She must be lonely to-day." And
without further word she walked away.
Gold green were the islands now, sparkling were the dancing waves,
though over the arm of the mainland there still hung a pall of clouds,
and once in awhile there was a rumble of distant thunder. "It has
been a wonderful storm," Gwen told Mr. Williams, "and if no one is
the worse for it I shall be glad of its having come, for it gave us a
scene I can never forget; those great masses of inky clouds dropping
fringes all along their edges, and those brilliant, sun-touched islands
in a silver rim of sea, beyond the gloomy spaces. It seems almost
like a prophecy, Daddy Lu, as if one might say to one's self, no
matter how dark and terrible the present seems, there is sunlight
beyond, sunlight that will spread and spread till you stand in its glory,
as you and I are doing this minute."
His rare smile lighted up his face. "That is the way to talk," he said.
"Some may be wrecked in the gale, but the same storm brings great
good to others."
"Oh, don't say that. I don't like to think of wrecks, wrecked vessels or
wrecked lives."
"Even wrecked lives may not be lost ones. Sometimes a person may
buffet with the seas for a while and then find a harborage. After the
storm has passed sunlight may reach him, too."
"That's better. I feel more content with that view of it. Are you going
down along, and will you let me know if anything has happened?"
"I will let you know in any event, if you like."
"That's the dear man you always are. I think I'd better go home now
to Aunt Cam. She will be getting anxious about me, and I must find
out if the rain has been leaking in at that south window."
"Very well. As the Spanish say, Hasta luego."
"That's a sort of 'auf wiedersehen,' I suppose."
"About the same."
They parted and Gwen sprang over the soppy ground, reaching
Wits' End to find her aunt and Lizzie busy with cloths mopping up the
floor under a window in the living-room, through which the rain had
leaked. They had placed basins and buckets to catch the drip, but in
spite of all the floor had not escaped a puddle. "The hogshead is full
and we have caught a lot more water in the boiler and the tubs, so
we are well supplied," said Miss Elliott as Gwen entered.
"Good," cried Gwen. The value of rain water was not to be under-
estimated.
"Where have you been?" asked her aunt. "I hope you were under
shelter during that downpour."
"I was in Miss Phosie's kitchen at first," Gwen told her, "but it was so
glorious I had to go down to the rocks to watch it all."
"And in consequence no doubt your feet are sopping wet. I'll have a
fire made in the fireplace at once."
"No, please don't. The sun is shining hot on the back porch. I'll
change my shoes and wet skirt and sit out there."
"You'd better have a fire," persisted Miss Elliott, and had her way, for,
as Gwen said, "When Aunt Cam really determines to do a thing she
manages to carry her point. That is why she was such a success in
China. If she said a patient must swallow a pill he had to do it."
And therefore it was sitting by the open fire that Luther Williams
found the two a little later on. As he stood in the doorway in his
fisherman's garb, flannel shirt, trousers tucked into high boots, Miss
Elliott found no suggestion of that elusive likeness which had
puzzled her more than once. She welcomed him cordially. "Come
right in, Mr. Williams," she said. "What is the news?"
"I've come to report no wrecks so far as discovered," he told her.
"Your niece was afraid the storm might have done some serious
damage about here, but so far as we know all are safe. I looked off
toward Jagged Island just before I started, Miss Gwen, and I think
your friends are on their way. The sea has calmed down and they'll
have no trouble getting in."
"Ethel and Mr. Mitchell, Aunt Cam," Gwen explained. "They
happened to choose this of all days to go over, and I am afraid they
were drenched."
"There's a house over there, you know," volunteered Mr. Williams,
"and it's probable they took shelter there."
"No doubt they are safe then," returned Gwen, "and—and Cap'n
Ben's boat, Mr. Williams?"
"That's in too. The man who had it to-day had started, but he saw the
storm coming, and turned back in time. He waited till the storm was
over before he made a second venture, then he came only so far as
the upper end of the island where he left his boat and some of his
traps and footed it home."
Gwen was grateful for the generalization of the boat's occupant, but
she could not resist asking, "Did you see the storm-tossed mariner,
Mr. Williams?"
"No, but Cap'n Ben did, and he told me, so it's reliable information."
"Thank you, Daddy Lu," said Gwen with a flashing smile which was
answered by as bright a one.
Miss Elliott looked from one to the other. "There!" she exclaimed
suddenly, "I know who Mr. Williams reminds me of, Gwen. It is your
grandfather Whitridge. Do you happen to have any relatives of that
name, Mr. Williams?"
"Yes," he said after a pause, "I have some distant ones. My own
people are all dead, but I believe there were some of the Whitridge
line alive when I last heard."
"And you never told me you had relatives of my name," said Gwen
reproachfully. "Why, we might be kin ourselves."
"Do you chance to have any relatives by the name of Williams?"
asked the man steadily. He turned to Miss Elliott.
"No, not that I know of," she answered. "The connection is not on my
side of the house, you see. It was my sister, Gwen's mother, who
married a Whitridge. Those family likenesses are very puzzling," she
went on. "They crop up in the most surprising manner. You have
what I should call the Whitridge smile, and Gwen has the same."
"I am glad it is anything as pleasant as a smile," returned Mr.
Williams. "You say I resemble your niece's grandfather. Is the
gentleman still living?"
"Now, Daddy Lu, you know I told you I hadn't anyone but Aunt Cam,"
Gwen again spoke reproachfully. "If I had a grandfather I would
surely claim him."
"I beg your pardon," he said. "Sometimes families become
separated. He might be living in some distant place, you know. Did
your father resemble him?"
"Did he?" Gwen turned to her aunt.
"I never saw Gwen's father after he was grown," said Miss Elliott. "I
knew him only by repute, and by a photograph taken when he was
first married."
"He was a noble man," said Gwen proudly. "Wasn't he, Aunt Cam?"
"Yes, very noble," she returned, but she spoke sadly.
"He gave his life for another," Gwen put in eagerly.
Mr. Williams, standing rigidly upon the hearth, did not reply, but
looked fixedly in the fire.
"Don't you think that the noblest thing a man can do?" continued
Gwen.
"There is more than one way of giving a life, too," remarked Miss
Elliott, as if speaking to herself. "Sometimes one lays down his life
and the world does not know it. He does not have to die to do that."
Gwen looked at her in surprise. "What are you saying, Aunt Cam?
One doesn't have to die? What do you mean? But my father did die
for another, Mr. Williams. What do you mean, Aunt Cam?"
"Are there no deaths then but the giving up of one's last breath?"
inquired Miss Elliott. "Haven't you heard the expression, 'dead to the
world'? There was a man out in China who certainly laid down his
life. He is still upon this planet, but he has sacrificed everything,
home, love, all that was dear to him for the sake of others."
Gwen knew who this was. Had she not seen the little picture, her
aunt treasured, of a young ascetic with burning eyes and a firm
mouth? "Oh!" she said and looked satisfied at the explanation, as did
the man who turned his eyes from the fire to the woman and, to
Gwen's surprise, looked an intelligent sympathy.
CHAPTER XV
ON THE DECK OF THE DOMHEGAN
There was an air of suppressed gaiety and subdued exultation in
Ethel Fuller's manner when she met Gwen that evening at Cottage
Hall where a concert was going on. She was rather splendidly attired
for the occasion, and swept in alone. Mr. Mitchell arrived later with
his mother and two of the Misses Gray. Gwen made a place by her
side for Ethel. The music had not begun, for one of the singers was
rushing around trying to find an accompanist, the one expected
having failed him at the last moment.
"Did you have a dreadful time of it?" asked Gwen sympathetically as
Ethel seated herself. "Weren't you awfully scared when the storm
came up?"
"Not exactly scared," returned Ethel, "though it was rather frightful.
We took refuge in an out-building and didn't get wet at all."
"What would you have done if the storm had continued?"
"I'm sure I don't know. Fortunately that problem didn't have to be
faced."
"It was a gorgeous storm. I fairly revelled in it," said Gwen, "or I
should have if I hadn't been worried."
"About us?"
"Yes, and about all who were out on the water. Didn't you think it was
a splendid sight?"
"I am afraid I didn't think much about that part of it. We couldn't see
very well from where we were."
"Where were you?"
"In a barn, sitting on a sawhorse."
"And you weren't scared?"
Ethel smiled, a sort of retrospective smile which suggested pleasure
rather than fright. "Here comes Jack Lansdale with Flossy Fay," she
said. "I didn't know she had brains enough to grapple with his
accompaniments, but perhaps she is equal to them. Why didn't he
get Miss Caroline Drake?"
"Probably because Flossy was the more available. She looks as
pleased as Punch. Now they're going to begin."
Jack Lansdale had a fresh, unspoiled baritone voice of pleasant
quality. He was quite a shining light among a not inconsiderable
number of musical people. A genial, robust, dark-haired young man
was Jack, who was as much at home in sailing a yacht as in guiding
a dance, and who was as ready to go off for a tramp with a boon
companion as to sit on the rocks in the moonlight and pay
compliments to a pretty girl, consequently, as he was good-looking
as well as athletic he was in much demand. To his credit be it said
that he was most accommodating and seldom refused to sing when
an accompanist could be found, but this was holiday time and even
the most enthusiastic musician could not be expected always to be
ready for a day's sailing, to play accompaniments or dance music,
therefore it was sometimes rather difficult to find one willing to be
pressed into service. Flossy Fay, however, had assiduously charged
herself to learn his accompaniments, and had made such diligent
use of her hour at the piano in the hall that she felt herself equipped
to play the part of understudy when occasion should offer. This
evening it had arrived, and her triumph was complete, for what more
delightfully intimate than to follow a voice dependent upon her skill in
accompanying?
After Jack's first songs, came a violin solo, then there were more
songs. At the last moment, the missing pianist, Tom Belden, rushed
in ready to supersede Flossy at the piano, but she clung to her
rights, and the sturdy Tom retired to the back of the hall, to appear
later to help out with the dances.
One swift glance at a seat near the door showed Gwen that Kenneth
was in the audience, but he had disappeared by the time the chairs
were pushed back and the dancing had begun. As usual Mr. Mitchell
divided himself between Gwen and Ethel, though Gwen remembered
afterward that to her share had fallen fewer dances than usual, and
that Mr. Mitchell and Ethel had sat out more than one dance on the
porch. These little informal affairs always closed early and ten
o'clock saw the lanterns bobbing in various directions as the dancers
wended their way home over uneven paths. Usually a party of them
tarried for awhile at the ice-cream saloon, where delectable ices
were to be had, and where the sweets were highly approved. It was
a cosy little place, the "saloon" proper being divided from the small
shop by portieres of antique make and design, these being nothing
more nor less than hand-woven blue-and-white counterpanes,
heirlooms in the family of Timson. This evening, however, Gwen did
not join the other young people at the favorite resort but jogged
along with the Misses Gray. There was a trip to Portland to be
undertaken the next day, and she must be up and off betimes in
order to get through the day's shopping which had become a
necessity.
It was not an unpleasant duty to seek the tidy bright little city, which
always had the air of being freshly washed and dressed, for one
generally found some pleasant neighbor to chat with on the way, and
even the slow-going steamboat, winding in and out among the
islands of Casco Bay, was not a bad place to rest in after a day's
rushing about from shop to shop. If the weather were good there was
no more charming series of views than those in which fair islands,
rippling water, and distant wooded shores found a place. Sails made
rosy by the setting sun, golden gleams along sandy beaches, sun-
touched rocks, and emerald sea gave such color as delighted most
of those who sought these favored shores, and Gwen's was the
most ardently nature-loving soul among them.
She glanced over the assemblage of those who had congregated
upon the upper deck, but seeing no vacant place upon the side she
preferred, she went down stairs. The little cabin was full of shoppers
with baskets and bundles, women with babies, travellers with bags,
but she had no desire to stay cooped up within, so she stepped out
upon the little narrow deck usually unfrequented by passengers.
There were but three occupying chairs here; one was a stalwart man
surrounded by huge parcels, another was a portly woman who had
settled herself in the midst of a collection of bundles, boxes and
bags. Between these two, and quite aloof, sat Kenneth Hilary. A
vacant stool was between him and the portly woman. Gwen's mind
was quickly made up. She climbed over a huge coil of rope in her
way, circumnavigated, as well as she could, the collection of
bundles, boxes and bags, possessed herself of the vacant stool and
sat down, planting her own bag firmly in front of her. Then turning
around she said demurely, "Good evening, Mr. Hilary."
"GOOD EVENING, MR. HILARY."

He looked around quickly. There was no escape. The ponderous
man had hedged himself in securely at one end, the stout woman's
array of goods formed a barrier at the other, and even supposing he
were to brave the dangers that Gwen had done, he must incommode
the girl herself and show himself distinctly rude. There was nothing
to do but accept the situation. "Good evening," he said and then
silence fell.
Gwen turned her head slightly that her eyes might rest on the man's
goodly length of limb, the shapely hands, the rather rugged but
wholly attractive face under the yachting cap. The brilliant eyes were
turned away. If only she could see into their clear brown depths and
bring again that intense expression she had beheld more than once.
In spite of the discouragement which met her first efforts she felt the
opportunity to be as golden as the light which glorified land and sea,
and she took her courage in both hands. It was now or never. "I
haven't seen you for such a long, long time," she said a little
tremulously. "At least I haven't had a chat with you. Did you get
some good sketches that foggy day when I met you on the road?"
"Fairly good ones," was the none too responsive answer.
"I'd love to see them."
No reply, only a tightening of the lips.
"Dear me," thought Gwen, "it is going to be harder than I imagined. I
shall have to go to greater lengths. I am not to be met half way at all.
It seems perfectly dreadful," she began again, "to think of all the
lovely things you may have been doing, and that I have not seen one
of them."
"You are very good to speak so flatteringly of my poor efforts."
"Ice," thought Gwen, "snow-balls similarly, and all the frozen things
combined. I shall have to take another tack. I saw you at the Hall last
night. Why didn't you stay to the dance?"
"I was tired."
"Nothing doing in that direction," Gwen told herself in girlish
vernacular. "Well, there are two good hours before us. I shall have to
thaw him out in some way. Suppose, just suppose it should be my
last chance in life to meet him undisturbed." She ventured again.
"The summer is almost over. Shall you be sorry to leave the island,
Mr. Hilary?"
"For most reasons, no. I have made pretty good use of its
possibilities for one season."
"A little better. I'll follow this up," Gwen decided, then aloud, "It has
so many possibilities I don't think they can be used up in one
season. Shall you come back next summer?"
"I doubt it, though it's rather too far ahead to make plans."
"But your plans—Fools rush in,"—Gwen quoted to herself—"I am
interested in them. You were to decide something very important.
Have you had any more light on the subject?"
"I have decided to keep on working and studying. Some day I may
be an artist."
"Oh, I am so glad," broke out so spontaneously that the young man's
rigid expression softened a little. "Then," the girl continued, "what
about the holes in the family fortunes? You don't have to—darn
them?" She laughed a little.
Kenneth's face clouded again. The reference brought up too sweet a
memory of those first days of their acquaintance. "Fortunately for
me," he returned coldly, "the fortunes of my family have improved,"
and Gwen felt repulsed.
"I am not asking from idle curiosity," there was a little quiver in her
voice, "but because I am deeply interested." Then impulsively,
"Aren't you ever going to forgive me, Mr. Hilary? I was horrid, I was
vilely cruel that—that evening. I have been sorry ever since that I
was such a beast." Having gone thus far she continued rapidly, "I
have missed you dreadfully. It seemed such a lingering punishment
when day after day I caught glimpses of you out sketching, and knew
you were doing things I was dying to see, little bits that I loved off
there in Sheldon woods, beautiful, mysterious effects on the bay, and
those wonderful opalescent colorings of certain evenings. Don't you
think I have been punished long enough? Can't we be friends
again?" She spoke wistfully, almost as if there were tears in her
eyes.
"Do you really feel that way about it?" asked Kenneth, nervously
twisting the cord which held a small package he carried.
"I feel just that way, and it's been growing worse and worse. You
would pass me by every time. You have taken such pains to avoid
me. You never came to the dances, and refused all invitations to
affairs where you knew you would be liable to meet me. So you see I
had every reason to feel that I had sinned beyond hope of
forgiveness. But, when I saw," she glanced at the barriers at each
end of the deck, "when I saw that you couldn't very well get away
without jumping overboard I made up my mind to risk my life by
climbing over that mountain of shopping," she nodded toward the
portly woman, "in order to tell you that I am sorry for what I said. It
was fairly brutal."
There was no answer, but the nervous twisting of the cord ceased,
and the hands gripped the package as if they would crush it.
"Please, Mr. Painter-man, forgive a meek maiden, and put her out of
her suffering."
He turned suddenly. "Miss Whitridge, do you think I haven't suffered,
too?"
"I am sorry, oh, so sorry. Don't let's suffer any more, please."
"How can I help it when you are going to marry that—"
"Jar-fly? But suppose I have decided that I don't care for jar-flies in
my collection, even when they have gold wings, ruby eyes and are
powdered with diamond dust? Suppose the jar-fly has flown to
another flower and that I saw him go with joyous satisfaction?"
"Is that absolute truth?"
"Absolute. Yesterday the jar-fly and the butterfly, like the owl and the
pussy cat, 'went to sea in a beautiful pea-green boat,' and if they
didn't reach 'the land where the bone-tree grows,' they did get
caught in the storm on Jagged Island. The result I foresee, for if they
are not actually engaged they must be close to it, judging from
certain looks and remarks of last night, while I am ready waiting with
my blessing, which I assure you will be of the heartiest kind." She
turned a smiling face upon her companion. "Please remove the
instruments of torture. I have made my confession."
"Thank you for it. Consider the instruments of torture, as you are
pleased to call them, sunk in the depths of the sea."
"Thanks. I think I notice a volume of steam issuing from the spot
where they sank. Now we are friends, aren't we? And you are going
to tell me about the family fortunes. You are going to let me see all
your sketches, every single one, and you are never going to pass me
on the road without stopping to say some nice friendly thing. You
promise all this?"
"All of it."
"Family fortunes first, for, of course, the other things have to wait.
What has happened?"
"My mother has entered a second time into the matrimonial state.
Her husband has ample means, so the family fortunes don't even
have to be patched. When they get ragged they can be thrown
away."
"How perfectly lovely. That is the last solution we should have
dreamed of, isn't it?"
His heart leaped at that use of the first person plural. "I certainly
didn't expect it," he said.
"And you don't feel sorry? Not a bit?"
"Not at all. I am very glad if my mother is happy. He isn't exactly the
kind of man I should have selected as a veritable parent, but since
my mother is satisfied I have nothing to say."
"What is he?"
"A wealthy brewer, or pork-packer or something of the kind."
"You have met him?"
"Yes. He is large, florid and expansive in manner."
"You didn't go to the wedding?"
"I wasn't asked. They stepped off quietly, were married and sailed for
Europe at once."
Gwen pondered over the information. "Before then what was
happening to you? Had you decided to stick to your palette and
brushes?" she asked presently.
"No. I had decided to do the other thing."
"Absolutely?"
"Absolutely."
"How miserable you must have been with a desk and counting
house ever before your eyes. You were all alone, too, for your sister
and the children were away. You poor boy!" Her voice was tender as
she remembered that she had added to his unhappiness. "It is
perfectly lovely," she went on, "to think that you don't have to
sacrifice yourself."
"I shall be a poor man for a great many years, I am afraid," he said
soberly.
"What of it? You are young, and it is worth everything to be able to
follow the occupation you love best. 'The best use of your best
powers' is how some one defines happiness, so you will be happy.
Perhaps the new papa will send you abroad to study."
"Do you think I would go under such circumstances?" returned the
young man fiercely.
"Proudy! Well, maybe he'll buy all your pictures. You couldn't refuse,
not to one of the family, who isn't a—jar-fly."
Kenneth laughed a little. It was so delightful to respond to her gay
spirits, to be able to feel in sympathy with her sly allusions. They
were back again on the old footing. He laughed again. "No, he isn't
that, but I don't believe he will want to buy my pictures, in spite of
there not being the same reason for refusing to sell as when you—"
"When I acted like a cold-blooded jellyfish." She blushed when she
remembered the exact cause of that refusal to sell, but she was
happy, absurdly so. The blood was coursing wildly through her veins.
She had triumphed and not only did she glory in her victory, but she
felt that the vanquished hugged his chains. "That fatal picture," she
sighed. "Did you paint another like it?"
"Not exactly, though much the same."
"And have you sold it?"
"No."
"Any others?"
"Two or three small ones."
"What are you going to do with that one?" she asked with sudden
audacity.
"Which one?"
"You know. The wave that threatened to wreck our friendship."
He did not answer for a moment, but sat gazing at her, at the joyous
curves of her sweet mouth, the flying tendrils of hair that curled
around her small ears, the tender expression of her clear eyes. "Will
you take it?" he asked suddenly. "I make no conditions—I have no
right. I have my way to make, you know, but if you will have the
picture—"
"As a sign and seal of our eternal friendship? Yes, I will take it gladly,
and thank you a thousand times. You are right. You have your way to
make, and you must not let anything stand in the way of that. No
man has the right to hamper his career in the beginning, and no
woman," she added softly, "would allow him to, if she valued his
success at all. I do value yours, Mr. Hilary."
"I believe it, dear Gwen. Please let me call you that, and say
Kenneth to me."
"I agree, for we are friends, real, true, loyal friends aren't we?"
"We are that. At the very least I am your true friend. At the very most
—I cannot tell you what I am at the most. Some day I hope I may."
"Wait till that some day, and in the meantime you will tell me
everything else; you will see me often and life will be very sweet, I
hope. Are we so near home? Yes, ours is the next landing, and—oh
dear me, I hadn't noticed that our heavily burdened neighbors had
gone ashore. We are the only ones left on this deck. Did you think I
was very forward to make that venturesome journey over all that pile
of stuff in order to speak to you? I did it wilfully because I simply
could not have things going on so wofully."
"I not only forgive you, but I bless you for your heroism. Do you
forgive me for being so stand-offish?"
"You were horrid. I never saw such an iceberg."
"As I pretended to be. It was all pretence. I was a seething volcano
inside when you sat down."
"Oh, you nice boy to confess it. Are you going to walk home with me
and help me carry my bundles? You have such an insignificant little
one compared to mine."
"Only some little tubes of colors I went up on the noon boat to get. I
can put them in my pocket and I'll gladly carry all yours."
"I am willing to take my share of the burdens; I am young," returned
Gwen with a swift look that made the man's heart beat fast, for what
underlying promise was there not in her words, the more
emphasized as the blue eyes drooped softly and she turned shyly
away under his ardent gaze.
At last the steamer stopped at the lower wharf, and the two took the
path along a way odorous with sweet grass and bracken, then over
the long white road they travelled slowly, up the little incline, past
Cap'n Ben's house and through the stile to the pasture, talking
merrily of light things.
Just before reaching Cap'n Ben's they saw Ethel and Mr. Mitchell
coming home from the rocks. Gwen waved her umbrella and called
out to them; they answered cheerily and both went toward Almira

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Understanding Financial Risk

Tolerance: Institutional, Behavioral and

Banking and Beyond: The Evolution of Financing along

2017 Financial Risk Manager (FRM) Exam Part I Financial

Suicide Tourism: Understanding the Legal,

Understanding Disaster Risk: A Multidimensional

Basic Statistics for Risk Management in Banks and

Financial Institutions Management: A Risk Management

Sustainable Finance and ESG: Risk, Management,

Understanding Risk-Taking 1st ed. 2020 Edition Jens O.

ISBN 978-3-031-13130-1 ISBN 978-3-031-13131-8 (eBook)

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022

Cover illustration: © John Rawsterne/patternhead.com

This book focuses on the contribution of financial risk tolerance in

Venice, Italy Caterina Cruciani

1 Financial Risk Tolerance: Where Does It All Start From? 1

3 The Market in Financial Instruments Directive 2

1.1 The Digitalization and Open Challenges 120

Caterina Cruciani is Assistant Professor in Financial Markets and Insti-

Gloria Gardenal is Associate Professor of Corporate Finance and a

professional social networks (LinkedIn, Academia.edu, ResearchGate)

Giuseppe Amitrano is the Chief Executive Officer at WieldMore Invest-

Financial Risk Tolerance: Where Does It All

Abstract This chapter introduces the relevance of the debate on finan-

Keywords Mutual funds · Risk tolerance drivers · Financial knowledge

© The Author(s), under exclusive license to Springer Nature 1

1 A Crossroad: Why Looking at Risk Tolerance?

1.1 The Economists’ View

macroeconomic literature is not conclusive on whether increasing stock-

1.2 The Macroeconomic Perspective

1.3 The Regulator’s View

financial soundness and good reputation are necessary (Article 3 point

be sufficient to make relevant decisions (Principle 21). The information

2 Trends in Financial Risk Tolerance

2.1 Definitions of Risk Tolerance

2.2 Risk Tolerance Determinants

research is needed in the domain of business and psychology (Grable,

occupation is positively associated with risk tolerance (Grey & Gordon,

seemingly not consistent with one’s attitude to risk. This explanation

driven by race or by cultural differences. Some of the studies have demon-

considers it a key aspect to determine the suitability of the financial

channels used to buy mutual funds. They discover that multiple-channel

2.2.2 Economic Factors

2.2.3 Personality Psychology

2.3 Measurement Tools

Variable Effect References

Age Negative relationship Bajtelsmit and Bernasek (1996), Chang

Variable Effect References

pattern (1976), Friedman and Rosenman (1974),

2.3.1 Choice Dilemmas

2.3.2 Expected-Utility-Based Tools

prefer a much smaller certainty equivalent than a risk-neutral person

allows reconciling some of the apparently inconsistent choices observed

2.3.3 Objective Measures

2.3.4 Heuristic Methods

4 The questionnaire documentation is available at this link https://hrs.isr.umich.edu/

that the theoretical literature up to the mid-1990s seemed unable to

2.3.5 Self-Reported/Subjective Risk Measures

2.3.6 Risk-Behavior Scales