Measuring Financial Risk Attitude: How to Apply Both Regulatory and Scientific Criteria to Ensure Suitability

Bernhard A. Metzger and Robert R. Fehr

Journal of Behavioral Finance, 2018, vol. 19, issue 2, 221-234

Abstract: Due to regulatory requirements, assessing investors' attitude toward financial risks is becoming increasingly important for advisors. To address this, the authors aimed to develop a risk attitude questionnaire, based on existing instruments, which fulfills both regulatory and scientific criteria. They conducted a survey on real investors and linked the survey data to actual portfolio data to test the validity of the instrument. The risk attitude index the authors developed uses only 6 easy-to-understand items, is reliable (Cronbach's α = 0.88), and explains substantial amounts of variance (R2 = 0.40) in the investors' behavior. It therefore fulfills regulatory and scientific criteria.

Date: 2018
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DOI: 10.1080/15427560.2017.1376331

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