Risk Profiling through a Behavioral Finance Lens
Michael Pompian
Mar 2016 · CFA Institute Research Foundation
4.6star
12 reviewsreport
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22
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About this ebook
This piece examines risk profiling through a behavioral finance lens. Behavioral finance attempts to understand and explain actual investor behavior, in contrast to theorizing about investor behavior. It differs from traditional (or standard) finance, which is based on assumptions of how investors and markets should behave. Much has been written about the tension that exists between the willingness to take risk and the ability to take risk. Risk appetite is the willingness to take risk and risk capacity is the ability to take risk. In the behavioral context, risk appetite and risk capacity are defined in terms of known risks and unknown risks. Irrational client behavior often occurs when a client experiences unknown risks. To aid in the advisory process, advisors can use Behavioral Investor Types to help make rapid yet insightful assessments of what type of investor they are dealing with before recommending an investment plan. With a better understanding of behavioral finance vis-à-vis risk taking, practitioners can enhance their understanding of client preferences and better inform their recommendations of investment strategies and products.
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4.6
12 reviews
ntokozo thungo
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November 14, 2024
Good read 👌👌👌
Lê Thành
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December 28, 2024
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