ASSESSING INVESTORS' RISK TOLERANCE THROUGH A QUESTIONNAIRE  
Discussion Paper No. 4 (July 2012)
JEL Classifications: D03, G11

Nadia Linciano
CONSOB, Research Division, Economic Research Unit
e-mail: n.linciano@consob.it

Paola Soccorso
CONSOB, Research Division, Economic Research Unit
e-mail: p.soccorso@consob.it

Abstract

The assessment of investors' risk tolerance by investment firms is a crucial issue both for regulators and for the industry. The economic and psychological literature has identified a set of factors affecting the risk preferences and perception by individuals and a series of features that make the questionnaire an effective tool for risk profiling. The present study analyses the questionnaires used by a representative sample of Italian intermediaries in compliance with the suitability obligations dictated by the Market in Financial Instruments Directive (MiFID). In the light of the economic and psychological literature we review the way questionnaires are structured and given as well as their contents and wording. Regarding contents several limitations affect questionnaires. Questions used to assess customers’ investment knowledge and experience are poor: they often rely on individuals’ self-evaluation and are not aimed at verifying familiarity with basic notions like the relationship between risk and expected return and portfolio diversification. In addition the "measurement" of risk attitude almost always overlaps identification of the holding period and the purpose of the investment, in contrast with the suggestion of the literature stating that these items should be covered independently because they are affected by different factors. The way questions elicit risk tolerance does not control for those cognitive and behavioural biases which could induce flawed answers. As regards the wording, questions are often vague, ambiguous and use complex language unlikely to be understood.