InvestmentsJul 22 2021

How much risk is your client willing to take? 

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How much risk is your client willing to take? 
ByGeoff Trickey

Risk is in attendance at every decision we make, yet questions like ‘how much risk are you willing to take?’ prove very difficult for most people to answer.

At the very extremes of risk taking and risk aversion this distinction may be a bit clearer – but then, few people fall at the extremes of a distribution.

Nevertheless, this is the kind of question that financial advisers need answers to. Regulators around the world require that a client’s risk appetite should be taken into consideration when recommending products that they deem appropriate.

Personality psychology highlights extreme variation in people’s propensity for risk taking, although self-awareness tends to minimise these differences.

If we are unable to characterise our own risk disposition with any confidence, the challenge faced by advisers in meeting this regulatory requirement is all the more problematic. 

Looking at risk taking from a different perspective, Covid-19 has illustrated the very wide range of reactions to risk and uncertainty across the population. It has been suggested that the more risk averse will still be wearing masks even when the mandate for doing so is long past, whereas others will have viewed masks as an intolerable violation of personal freedom from the outset.

The wider perspective on risk taking includes ‘bring it on’ people prepared to put their life on the line, whether in sport, gambling, or business adventures. At the other extreme are clients in fortress-grade, burglar-alarmed homes, others for whom supermarket ‘display until’ dates trigger binning, or some whose obsessionally detailed holiday planning destroys all possibility of relaxation. People are just that different – the colourful pageant that is humanity.

Risk: emotion and cognition

At their root, risk dispositions are hard-wired. Neuroscience identifies two systems in the brain that contribute to decision making: one concerned with emotion, the other with cognition, and decision making always involves risk.

Findings from personality science support this analysis. The levels of risk that we are willing to accept in our occupations provide a very strong endorsement of this view. 

You will not find many risk-averse people working at the drill head on a North Sea oil rig, nor will you find excitable risk-takers working in accounts.

Risk disposition, however, is not always a criterion for job selection, and there are certainly roles in which personality would make little difference, or in which many different risk types would actually be a benefit. The role of air traffic controller is certainly not one of them.

In a series of replicated studies, air traffic controllers, as a profession, have been shown to be very similar in their risk-taking propensities.