Reconciling Self-Assessed with Psychometric Risk Tolerance : A New Framework for Profiling Risk Among Investors

Financial advisors need to assess their clients’ risk profile to properly manage their portfolio risk and comply with regulatory provisions. Assessing an investor’s financial risk tolerance (FRT) is a challenge in the advisory process and none of the existing measures can be easily employed on a large scale. Given the existence of a gap between self-assessed and psychometric measures of FRT, we propose a psychometric-based estimation model that estimates the unbiased FRT by leveraging the self-assessment that retail investors usually provide in standard questionnaires. Our model represents a promising tool for financial advisors looking to improve their customers’ risk profiling