Measuring Financial Risk Attitude: How to Apply Both Regulatory and Scientific Criteria to Ensure Suitability

Abstract

Due to regulatory requirements, assessing investors' attitude toward financial risks is becoming increasingly important for advisors. To address this, the authors aimed to develop a risk attitude questionnaire, based on existing instruments, which fulfills both regulatory and scientific criteria. They conducted a survey on real investors and linked the survey data to actual portfolio data to test the validity of the instrument. The risk attitude index the authors developed uses only 6 easy-to-understand items, is reliable (Cronbach's α = 0.88), and explains substantial amounts of variance (R2 = 0.40) in the investors' behavior. It therefore fulfills regulatory and scientific criteria.

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