Risk Preferences of Investors

Monika Mueller (), Paul Resnik () and Craig Saunders ()
Additional contact information
Monika Mueller: FCM Finanz Coaching
Paul Resnik: FinaMetrica Risk Profiler
Craig Saunders: Financial Suitability Forum

Chapter Chapter 3 in Robo-Advisory, 2021, pp 35-51 from Palgrave Macmillan

Abstract: Abstract An investor’s risk preferences are captured in their “risk profile” characterized by the balanced state of different dimensions of risk. A person’s financial risk tolerance is the foundation of their risk profile. Risk profiling is a regulatory requirement for both humans and robo-advisors. But there is no agreement on exactly what should be considered in a risk profile, how measurements should be taken, or how data should be weighted in making recommendations. The core questions to be resolved are the following: What methodology will produce valid and reliable risk-tolerance assessments? How is that methodology to be effectively deployed in the advice process? Robo-advisors approach risk profiling at a disadvantage due to their limited data points compared to a human who can observe and question. Compared to a human-based system, a robo-advisor faces extra challenges in developing understanding, writing comprehensive algorithms, and applying professional judgment.

Date: 2021
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DOI: 10.1007/978-3-030-40818-3_3

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