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...
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...
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...
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...