Risk attitude profiles of investors in the financial services industry: the impact of behavioral biases
Risk attitude profiling is an essential step in the financial advising process. It provides an understanding of the investor’s attitude and tolerance for investment risk. Data collection on risk attitudes is commonly collected from an investor’s choice between uncertain outcomes of a risky investment. However, responses are conditioned by a well documented behavioural bias in decision making under uncertainty known as “framing”. Individuals develop internal frames of reference as a simplifying behavioural heuristic when faced with decision making under uncertainty. The framing of attitudinal survey questions will condition an investor’s response to risk attitudes. Alternative frames can reverse attitudinal responses to the same choice. This paper examines the significance of framing in the risk attitude profiling process. We argue the need for alignment between the external framing of questions and the investor’s internal frames appropriate to a particular class of investment decision. Misalignment may bias attitudinal responses and lead to inappropriate investment advice. We analyse this within the context of providing advice for superannuation (pension) investment. A class of investment decisions with a common purpose, long time investment horizon, individual choice and large capital sums.
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