In last week's superb FT article on matching investors to investment risk, (Risk, the retail investor and disastrous new rules) John Kay rightly points out the foolishness of using recent historical volatility as a proxy for (future) investment risk. However, whilst focussing on the problems with establishing the risk of investments, he only briefly touched on determining appropriate risk levels...
Risk profiling is essential to providing good advice, and to ensuring regulatory compliance. Unfortunately, the profiling field is rife with misunderstanding and poorly designed assessment tools, leading many advisers to view risk profiling as an unnecessary box-ticking exercise, rather than a simple and effective way to improve client outcomes. A particularly problematic approach to profiling is the failure to distinguish between...
Greg Davies recently featured in the Financial Wellbeing podcast with Chris Budd In this Financial Wellbeing podcast, Greg and Chris discuss how our emotions effect our decision making process and how we can become more comfortable when making financial choices. They also cover how Greg got into applied decision science and what Behavioural Economics is and what it can do for...
A recent article for Money Marketing raised the question of whether risk profiling tools should have standardised scales A recent article in Money Marketing raised the question of whether risk profiling tools should have standardised scales. At present, some profiling tools map investors onto a variety of scales: five-point and seven-point scales are common, while some produce an output alleging to...
The partnership will bring together industry leading capabilities in decision science, behavioural finance, and risk profiling Combining the deep expertise and industry knowledge of Centapse with the academic rigour and research capabilities of Oxford Risk, the collaboration will offer behavioural finance consultancy, advanced data analytics, and intelligent decision-support systems. An expanded suite of risk profiling tools will be released for Oxford Risk...
Summary of full article (published by CFA Institute Research Foundation) Risk profiling is fraught with misunderstandings that lead to ill-advised approaches to determining investment suitability. These include using observed behaviour to determine risk tolerance; optimising for “behavioural” risk attitudes, rather than helping clients mitigate and control them; eliciting risk tolerance on subcomponents of overall wealth; using overengineered and unstable approaches for measuring risk...
New approaches to risk profiling are garnering increased attention in recent years. Many of these, however, are over-engineered and unnecessary. This is particularly true of those that claim to simultaneously measure multiple parameters of complex decision models using ‘revealed preferences’. Such measures are unstable and, more importantly, confuse aspects of investors’ preferences that should be reflected in their ideal portfolio,...
In my recent article (for Cognitive Finance) I examine the allure of adopting artificial intelligence as a solution for a range of business problems in Wealth Management and the need to appropriately match solutions to problems. Use of A.I. tools and techniques should be specific to each problem...
Art is among the most emotional of asset classes. The journey from art lover to art investor can be littered with pleasure and pitfalls, and the profit may take many forms. For investors who want to take their love of art a step further, the decision to buy a piece of art as an investment may mark the ultimate clash...
Over 8 years ago in 2008, in the early days of setting up the Barclays behavioural finance team, and just before we were hit by the financial crisis, I wrote an article on things to avoid when designing a measure of Risk Tolerance. It contained 12 principles that designers of such tools should follow to ensure that what they are measuring provides a...