Investments  

How much risk is your client willing to take? 

There is another side to their nature however, the emotional side, which, paradoxically, is at the high extreme of risk tolerance. This is what ensures that, whatever the circumstances, they will stay calm and unruffled. Air traffic controllers are wired not to panic when things go wrong. 

Like air traffic controllers, we all have a cognitive and an emotional side to our risk dispositions representing two distinct and separate brain systems.

These interact to create the considerable variety in individual approaches to decision making. Combining these foundational measures of cognition and emotion orthogonally creates a complete 360 degree spectrum of risk dispositions.

For purposes of interpretation and communication, this can be segmented into eight distinctive risk types. Everybody sits somewhere in that matrix. 

Providing a framework

Psychometric questionnaires can deliver reliable and objective measures. Interpretation is based on extensive data and research findings, providing a framework and a vocabulary that structures purposeful discussions rather than relying on the variable and conflicting insights of different individuals.

In many ways, it is easier to objectify the risk dispositions of clients than it is to objectify the risk associated with financial products.

People are more consistent than markets. Advisers cannot be expected to add personality psychology to their skill sets. But, familiarisation with a well-defined framework of risk appetites and developing an understanding that can be shared with clients is readily attainable.

It makes an effective contribution in terms of communication and discussion. ‘How much risk are you willing to take?’ becomes an eminently answerable question. 

The emphasis in probabilistic reasoning has focused on uncertainty and the risk associated with financial products, rather than on people differences.

Estimates of expected utility recognise that people in different financial circumstances will differ in their perceptions of risk. However, reliance on wealth alone as a differentiating factor grossly oversimplifies the reality of the variability of client risk dispositions.

Differences in circumstances are important of course, but risk type is likely to be as variable among the wealthy as it is among the more hard pressed. Human nature trumps circumstances when it comes to decision making.

If we are advising mask-wearing clients to invest in bitcoin, we are probably getting something wrong.

Geoff Trickey is chief executive of Psychological Consultancy and founder of the Risk Type Compass