Psychometric risk questionnaires are a proven and valid means of risk profiling, however risk decision making is complex, comprising a myriad of factors that can influence a subject’s profile. These include beliefs, loss aversion, composure (itself dependent on a number of factors) - even the subject’s DNA, along with many, many more.
To test them all properly takes a lot of questions: ideally around sixty. The problem is people start to get bored after just five! The result:
Risk questionnaires today are a compromise between accuracy and engagement, typically asking only ten questions.
With typical ATR questionnaires, loss aversion is just one factor of many that influence the final risk profile. Given the limited number of questions that can be asked before clients lose interest (profiling fatigue) if loss aversion is tested at all, it’s typically through just a pair of questions. Such a limited test of loss aversion can be fine whilst it’s not a dominating factor, such as while markets are steady and the client remains composed.
But what happens when the outlook is not fine?
Behavioural economics and prospect theory shows us that when people are feeling anxious about losing money, such as during a bear market, loss aversion ceases to become ‘a’ factor in their decision making and starts to become ‘the’ factor.
It’s at these points that a person’s risk appetite can appear to suddenly change. In reality, their risk personality has not changed at all, but one aspect of it has become dominant: Loss aversion.
Our Behavioural Risk Score (BRS) is the uniquely revealing solution for modern risk profiling. It employs gamification to augment a traditional questionnaire with behavioural measures. Gaining both more accurate behavioural insights and significantly greater engagement.
Crucially, the BRS recognises that loss aversion can become a dominant factor in a client’s risk appetite and highlights it accordingly.
Gamification allows us to test far more data points than a questionnaire can afford to do. Boosting, instead of losing, engagement whilst improving the accuracy of the behavioural measures.
The result is a personalised risk spectrum ranging from a subject's psychometric-driven risk profile at the higher end to their loss aversion-dominated appetite at the lower.
A single visualisation that enables advisers and businesses to instantly see the inherent tension within a customer’s complex risk attitude and understand, at a glance, the degree the client’s risk appetite can change when they’re worried about losses. Like today.
In short The BRS visualises a client’s risk appetite when things are fine and how it can change when they are not. The BRS visualisation is a game changer in how businesses understand and relate to their customers.
Be-IQ’s BRS is a robustly validated methodology. Through pioneering research (including a survey of 10,000 subjects) working with some of the UK’s top, independent academics including professors of psychology, specialising in risk and decision making.
Both constituent dimensions of the BRS reveal consistent validity well above the typically accepted standard. Both research and real world data demonstrates both internal and external consistency and validity.
But perhaps the most validating feedback of all is from the consumers who see the resultant report. Commenting that 'That's me!' when their innate behavioural conflicts are visualised and explained before them.