Understanding Attitude to Risk

Attitude to Risk measures an individual’s comfort level with fluctuations in their investment returns. It is measured on a scale of 0 to 100, where 0 represents complete discomfort with any fluctuation and 100 represents complete comfort.


What is Attitude to Risk?

Below is a sample distribution of investor Attitude to Risk scores from hundreds of thousands of clients in a live commercial environment. 

John's attitude to risk score

Tailoring advice to Attitude to Risk

A client’s Attitude to Risk is an important factor in determining their Risk Comfort score. By considering each client’s unique Attitude to Risk, you can help them find a portfolio that balances their desire for returns with their tolerance for fluctuations.

Bonus: Clients with a higher Attitude to Risk are more interested in investing in actively managed funds. We recommend discussing actively managed investments to individuals with a score above 60.


Identifying Attitude to Risk in client decisions

A client’s Attitude to Risk can be estimated using their decisions on the slider. The farther to the right the position of the slider is, the more risk they take.


Examples

Attitude to risk score: 58
Attitude to Risk Score: 36

What’s underneath the Attitude to Risk score?

Our scores are grounded in science.

We use a two-parameter utility function that allows us to identify a range of behaviours in users’ decision making.

  • The first parameter is alpha (α), and it represents the extra probability weight the user puts on the loss. We calculate the Sensitivity to Loss score by scaling this parameter α.
  • The other parameter is rho (ρ), and it impacts the curvature of the user’s utility function. The Attitude to Risk score is based on the risk premium of the estimated utility function, which is impacted directly by ρ.

By using mathematics to understand each client’s unique preferences, we can precisely measure how satisfied they will be with each investment option and find the right investment portfolio for them.

To learn more about our science, you can check out our white paper: New Ground in Financial Risk Tolerance.

Did this answer your question?

If not, please feel free to reach out to us at customer-support@capitalpreferences.com