What do risk questionnaires really measure?
In a 2024 study on risk aversion*, the author asked 673 volunteers to fill in questionnaires about what they would do when confronted with different choices.
The first questions used the classic approach to measuring risk aversion by giving people the choice between a risky payoff (50% chance of $16) or a safe pay-out (guaranteed $4).
The results show a split between those who prefer this risky $16 and those who prefer the safe $4.
Nothing unusual there.
They then asked a similar question but made the maths more complex by saying that the payout was the average amount of money across 100 variable ($16 or 0) or guaranteed events. This time the payoffs yielded two guaranteed payouts ($8) or ($4), but the results were almost exactly the same.
The same number of people still chose the lower guaranteed $4 even when a guaranteed $8 was available.
The authors conclude that if the maths became too complex, then people would choose the simpler calculation. In this case it was (100 x 4)/100 rather than (50 x 16 + 50 x 0)/100.
Which means instead of measuring risk tolerance, we may well be measuring complexity aversion.
And that makes sense. Not everyone likes numbers and we are hard-wired to look for simpler – and energy efficient – answers and avoid expending unnecessary energy on thinking.
But we can also understand risk aversion through asking clients about their money histories and core beliefs. Clients who grew up in environments of scarcity may well be risk averse, or they may feel that they need to embrace every opportunity for gain.
Clients who grew up being told that only cash was safe and investing was a rigged game will struggle with taking risk. Don’t bother telling them about cash underperforming in the long-run and inflation eating away at their savings. They may also dislike risk questionnaires.
The beauty of this process is that by exploring a clients money beliefs, you will start to understand what’s driving their spending, saving and investing behaviour.
Not only that, you will have the most amazing conversations that build trust and connection.
Of course, you still need your risk assessments. But if you want to know what’s really going on for your clients, you need to have a conversation.
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