Questionnaires of Risk Tolerance, Regret, Overconfidence, and Other Investor Propensities

Abstract

The crisis of 2008 and 2009 exposed not only the shortcomings of our financial system but also the shortcomings of the tools used by financial advisors to assess and guide investors. These include risk questionnaires. Many investors who were assessed as risk tolerant in 2007 and assigned portfolios heavy in equities dumped their equities in 2008 and 2009 and some even dumped their advisors. In this paper, we attempt to examine the assessment of investors’ risk tolerance and what, beyond investors’ risk tolerance, should be assessed.

Keywords: Risk tolerance, Overconfidence, Hindsight, Regret, Trust, Maximization, Portfolio Theory, Behavioral Finance, Financial Advisors

JEL Classification: D81, G00, G11