Is Likert scale data suitable for parametric tests?

 Great question—and it's a common debate in research, including finance. Let’s break it down and then explain it with a finance-related example.

 What is a Likert Scale?

A Likert scale typically measures attitudes or perceptions using options like:

Strongly Disagree – Disagree – Neutral – Agree – Strongly Agree
→ These are ordinal (ordered, but not necessarily equal spacing).

 Parametric Tests Need Interval Data:

·         Parametric tests (e.g., t-test, ANOVA, regression) assume interval or ratio data—where differences between values are meaningful and consistent.

·         Ordinal data doesn't meet this strict requirement.

 The Debate:

·         Technically: Likert scale data is ordinal, not interval.

·         Practically: When Likert scales have 5 or more points, researchers often treat them as interval to apply parametric tests, especially if:

o    The data is roughly normally distributed

o    Sample size is large

o    Multiple items are aggregated (e.g., a survey with 10 related questions)

 In the Context of Finance:

Let’s say you're conducting a survey to measure investor confidence using a 5-point Likert scale:

“I am confident in the stock market’s long-term growth.”
Scale: 1 (Strongly Disagree) to 5 (Strongly Agree)

You collect responses from 500 investors.

🔹 Technically:

·         Each response is ordinal: we know 4 > 3, but not whether the "distance" from 3 to 4 is the same as from 4 to 5.

🔹 In Practice:

·         With many responses and a 5-point scale, you might treat the data as interval.

·         This allows you to:

o    Run regression analysis to study what affects investor confidence

o    Compare confidence between two groups using a t-test (e.g., men vs women)

o    Use ANOVA to compare across multiple demographic groups

 Summary Table:

Approach

View of Likert Data

Use Parametric Tests?

Typical in Finance Research?

Theoretical

Ordinal (non-equal intervals)

❌ No

Only use non-parametric tests (e.g., Mann-Whitney)

Practical (common)

Approx. Interval (5+ points)

✅ Yes (with caution)

✔ Widely used in surveys and behavioral finance

 Final Tip (for finance researchers):

If you're using Likert scales in investor sentiment, employee satisfaction, perceived risk, or financial literacy studies:

·         You can use parametric tests with justification.

·         But always check assumptions (e.g., normality, scale reliability) and mention your approach clearly in your methodology.

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