Can you please explain why risk tolerance questionnaires are generally effective for cognitive-based individuals? I couldn’t find it out in the textbook.
thinking … so they think and answer the way *maybe some amount of rationalization happens*
but which tiny fine print of which book did you read to come up with the above statement?
It’s from Book2, P154/155, Q2.
read pg 123/124 for the commentary regarding this.
Methodology of risk tol. questionnaire is helpful and can extract useful information.
- generate dramatically different results when administered to the same individual repeatedly.
- administered once, but not revisted despite the fact that IPS should be reviewed at least annually to measure ability and willingness to take risk.
- RT can vary as a result of changing life circumstances.
- Many advisors take results too literally - and hence RT Questionnaires should provide only broad guidelines and should be used with other tools for asset allocations.
- work better for institutional rather than individual investors - institutional investors are familiar with the MVO framework, think about risk - which is a cognitive process. For Individuals - risk taking is an emotional process - and therefore RT questionnaires fail for emotional biased individuals.
Thanks, cpk. Let me bookmark it.