Behavioural risk score

Introduction

The Behavioural Risk Score (BRS) compares a subject's psychometric results to their behavioural choices and arrives at an adjusted final score. It comprises of a validated psychometric questionnaire, used to ascertain a qualitative measurement of the client’s baseline risk characteristics, augmented against a quantitive measurement of two revealed-preference behavioural games.

The BRS factors in the subject’s risk profile, loss aversion, present bias, and (optionally) their investment experience to arrive at a final, behaviourally-adjusted, risk score. The resultant BRS score caters not only for the client’s stable risk characteristics but also for the unstable emotion-led behaviours most likely to derail the less experienced investor.

Interpreting a client's results

Whilst the BRS score encapsulates all of its underlying measures into a single score, the underlying difference between the psychometric and behavioural measures provide an insight into clients not available through traditional questionnaires. Be-IQ visualises the differences between the two core results, their ATRQ and their Loss Aversion, and displays these as an arc of risk range within which the BRS itself sits.

In many clients the width of this arc is quite narrow, within 18 pts, which we consider normal. However for some clients their results can differ by 30 pts or more. Below are three real-world examples of how a clients underlying results can vary and how they are visualised within your admin portal.

Double-validated result

The subject’s self-assessed (psychometric) result is very close to their observed behavioural choices.  There can be extremely high confidence in this subject’s risk score.

Typical result

The difference between the subject’s ATR & their normalised Loss Tolerance (LT) is within 18 pts. The BRS takes into account the differential, the consistencies, and the subject’s present bias (low) along with their investing experience to arrive at an adjusted final score.

Contra-indicators revealed

This subject sees themselves as medium-high risk, yet when faced with potential loss, profiled at a much lower risk. They present an unusually wide gap between psychometric and behavioural results. The BRS factors this gap into their final score. Where this sits on their arc will depend on their present bias score (good in this case) their investor experience (moderate). Had the client had low investor experience and a higher present bias score, the BRS would have moved fruitier to the left of their scale.

We nonetheless recommend advisers take note of clients with particularly wide BRS arcs, especially those with little or no investor experience. Their results suggest they are the most likely to be nervous during volatile markets and thus benefit from higher contact.