Beyond risk profiling: Overcoming biases to become resilient investors

THE purpose of risk profiling is to match an investor’s portfolio with both their ability and willingness to take risk. But “willingness” isn’t stable. It shifts with markets, headlines, and emotional reactions. It also varies depending on how a question is phrased in the risk-profiling survey.  

That’s why advisors should not stop at assessing risk preferences. To make risk profiling useful, they must also recognise and coach clients through the emotional biases that distort those preferences.

I first encountered the critical distinction between risk tolerance and risk attitudes in Michael Pompian’s Behavioral Finance and Wealth Management. His explanation, that true risk tolerance is a stable, personality-based trait, while risk attitudes are volatile and emotionally driven, was both revelatory and practical.