Latest Economic Review: Sunpointe Illuminations

Risk Profiling Through a Behavioral Finance Lens

In the first piece in this series, “Investor Risk Profiling: An Overview,” Joachim Klement set forth the challenges that traditional risk tolerance questionnaires present to advisers and their clients. He showed that the current standard process of risk profiling through questionnaires is highly unreliable and typically explains less than 15% of the variation in risky assets between investors. Klement explained that the cause of these deficiencies is primarily the design of the questionnaires, which focus on socioeconomic variables and hypothetical scenarios to elicit the investor’s behavior. In contrast, research in risk profiling has shown that several other factors can provide more accurate and reliable insight into the risk profiles of investors.