IDEAS home Printed from https://ideas.repec.org/a/aza/rmfi00/y2014v7i2p110-113.html
   My bibliography  Save this article

Risk tolerance: Essential, behavioural and misunderstood

Author

Listed:
  • Davies, Greg B.
  • Brooks, Peter

Abstract

An understanding of an investor's risk tolerance is essential to determining investment suitability and yet there is no universally agreed definition of what risk tolerance is. The authors discuss the need for a holistic approach to measuring risk tolerance that provides a consistent framework for constructing efficient multi-asset allocation and ensuring a suitable aggregate level of risk and return, given the investor's personality and financial circumstances. Risk tolerance is only stable when considered as a personality trait, which can be measured effectively using holistic psychometric scales. Attempts to measure risk tolerance at lower levels of granularity are unstable, they accentuate, rather than mitigate short-term behavioural distortions and cannot be meaningfully aggregated to provide an overall level of risk that is appropriate given the investor's risk capacity. This implies that the recent move towards mental accounting, goal-based, assessments of risk tolerance is misguided and exposes institutions to risks associated with providing unsuitable advice.

Suggested Citation

  • Davies, Greg B. & Brooks, Peter, 2014. "Risk tolerance: Essential, behavioural and misunderstood," Journal of Risk Management in Financial Institutions, Henry Stewart Publications, vol. 7(2), pages 110-113, March.
  • Handle: RePEc:aza:rmfi00:y:2014:v:7:i:2:p:110-113
    as

    Download full text from publisher

    File URL: https://hstalks.com/article/1242/download/
    Download Restriction: Requires a paid subscription for full access.

    File URL: https://hstalks.com/article/1242/
    Download Restriction: Requires a paid subscription for full access.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Mohamed Khalif Ali & Mohamed Kasim Ali & Khalid Abdukadir Hassan, 2020. "Factors Affecting Information Privacy and Protection Behavior on Social Network Sites," International Journal of Research and Scientific Innovation, International Journal of Research and Scientific Innovation (IJRSI), vol. 7(9), pages 406-418, September.

    More about this item

    Keywords

    holistic risk tolerance; investment suitability; portfolio construction; investing behaviour;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aza:rmfi00:y:2014:v:7:i:2:p:110-113. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Henry Stewart Talks (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.