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Risk Preferences of Investors

In: Robo-Advisory

Author

Listed:
  • Monika Mueller

    (FCM Finanz Coaching)

  • Paul Resnik

    (FinaMetrica Risk Profiler)

  • Craig Saunders

    (Financial Suitability Forum)

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.

Suggested Citation

  • Monika Mueller & Paul Resnik & Craig Saunders, 2021. "Risk Preferences of Investors," Palgrave Studies in Financial Services Technology, in: Peter Scholz (ed.), Robo-Advisory, chapter 0, pages 35-51, Palgrave Macmillan.
    • Handle: RePEc:pal:psincp:978-3-030-40818-3_3
    DOI: 10.1007/978-3-030-40818-3_3
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    References listed on IDEAS

    as
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    5. Moshe Levy & Haim Levy, 2013. "Prospect Theory: Much Ado About Nothing?," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 7, pages 129-144, World Scientific Publishing Co. Pte. Ltd..
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    Cited by:

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