These questionnaires that use $$ rather than percent of capital make no sense to me. At $1000 I will be looking purely at present values of returns, but ask me about 50% of my capital and emotions and risk appetite start to matter. Also, 100% equities in Berkshire Hathaway is different that 100% in small cap or tech stocks. Both these options are classified as aggressive. I don't agree that they should be the same.
I agree. However, using a percentage of capital will be confusing to most readers, and the original researcher had pretty good arguments about these questions (12 & 13), which you are referring to.
From the paper:
"This distinction is subtle but profound. In both cases, the mathematical payout (i.e., cash flows) are identical. Individuals who choose the sure choice act consistent with risk aversion theory, whereas those who choose to gamble in both cases
are most likely risk takers.
When combined together by averaging answer weights into a single score, these two items work well in predicting financial risk tolerance. Most individuals, assuming they have no prior knowledge of the items, choose the sure gain in item 12 and the chance in item 13. This would indicate a person with moderate risk tolerance.
Again, a person who chooses both the sure gain in item 12 and sure loss in item 13 will generally exhibit risk-aversion characteristics, whereas someone who takes a chance
in both situations will exhibit risk-taking characteristics."
I think that your MS readers will be able to determine if $1000 is a material amount of their capital. That was my main point. If the amount is immaterial to me the expected value wins out, while I am more risk averse as it becomes a bigger percentage of my net worth. Risk appetite changes when you have enough money that part of your strategy is to make sure you don't lose it.
The questions asked are pretty common to me. As with any questionnaire it's only useful if those being tested aren't able to manipulate the results.
"While individual equities are easily an order of magnitude riskier than fixed income, they rarely provide the return to compensate for this extra risk."
We in India have an index growth of 12% CAGR for past 30 years (if I'm getting it correct) + Cost of living is also low + We're expecting 7% Real GDP growth.
Dont you think we Indian's are in better position in Equity investing?
These questionnaires that use $$ rather than percent of capital make no sense to me. At $1000 I will be looking purely at present values of returns, but ask me about 50% of my capital and emotions and risk appetite start to matter. Also, 100% equities in Berkshire Hathaway is different that 100% in small cap or tech stocks. Both these options are classified as aggressive. I don't agree that they should be the same.
Hi Max,
I agree. However, using a percentage of capital will be confusing to most readers, and the original researcher had pretty good arguments about these questions (12 & 13), which you are referring to.
From the paper:
"This distinction is subtle but profound. In both cases, the mathematical payout (i.e., cash flows) are identical. Individuals who choose the sure choice act consistent with risk aversion theory, whereas those who choose to gamble in both cases
are most likely risk takers.
When combined together by averaging answer weights into a single score, these two items work well in predicting financial risk tolerance. Most individuals, assuming they have no prior knowledge of the items, choose the sure gain in item 12 and the chance in item 13. This would indicate a person with moderate risk tolerance.
Again, a person who chooses both the sure gain in item 12 and sure loss in item 13 will generally exhibit risk-aversion characteristics, whereas someone who takes a chance
in both situations will exhibit risk-taking characteristics."
I think that your MS readers will be able to determine if $1000 is a material amount of their capital. That was my main point. If the amount is immaterial to me the expected value wins out, while I am more risk averse as it becomes a bigger percentage of my net worth. Risk appetite changes when you have enough money that part of your strategy is to make sure you don't lose it.
The questions asked are pretty common to me. As with any questionnaire it's only useful if those being tested aren't able to manipulate the results.
"While individual equities are easily an order of magnitude riskier than fixed income, they rarely provide the return to compensate for this extra risk."
💯 https://blog.inverteum.com/p/individual-stocks-fools-game
Appreciate you for this Article.
We in India have an index growth of 12% CAGR for past 30 years (if I'm getting it correct) + Cost of living is also low + We're expecting 7% Real GDP growth.
Dont you think we Indian's are in better position in Equity investing?