Questionnaires of Risk Tolerance, Regret, Overconfidence, and Other Investor Propensities
28 Pages Posted: 9 Feb 2010 Last revised: 15 Mar 2012
Date Written: March 10, 2012
Typical risk questionnaires aimed at helping advisors guide investors are deficient in five ways. First, each investor has a multitude of risk tolerances, one for each goal and its mental account. Probes for one global risk tolerance miss that multitude. Second, the links between answers to questions in risk questionnaires and recommended portfolio allocations are governed by opaque rules of thumb rather than by transparent theory. Third, investors' risk tolerance varies by circumstances and associated emotions. Failure to account for such variations biases assessments of risk tolerance. Fourth, risk tolerance varies when assessed in foresight or hindsight. Hindsight amplifies regret. Investors with high propensity for hindsight and regret might claim, in hindsight, that advisors have overstated their risk tolerance. Fifth, investor propensities other than risk tolerance and regret matter to advisors as they guide investors. We discuss these deficiencies and offer remedies, based on a survey of more than 2,500 people.
Keywords: Risk tolerance, Overconfidence, Hindsight, Regret, Trust, Maximization, Portfolio Theory, Behavioral Finance, Financial Advisors
JEL Classification: D81, G00, G11
Suggested Citation: Suggested Citation