Can portfolio risk be described with estimates of financial risk tolerance calibration?

The purpose of the study was to analyze the degree to which categories of financial risk-tolerance miscalibration are associated with portfolio choices made by financial decision-makers. A differential prediction model was applied to investment risk tolerance data from 2017 to 2018 to assess the presence of miscalibration. Results from Tobit regressions showed that some survey respondents did engage in the miscalibration of their financial risk tolerance. Although results varied by sub-samples, those who systematically under-estimated their financial risk tolerance were observed to hold portfolios that were less risky than those who were able to match their self-assessed risk tolerance to their psychometrically reliable score. No clear pattern of portfolio choice for those who over-estimated their financial risk tolerance was noted. Being female and between the age of 55 to 64, having an income of $100,000 or more, and working with a financial advisor were found to be more consistent descriptors of portfolio risk compared to risk-tolerance miscalibration.

Automated summary

The study examines the relationship between miscalibration of financial risk tolerance and portfolio choices made by financial decision-makers. It finds that some individuals underestimate their risk tolerance and hold more conservative portfolios. No clear pattern is observed for those who overestimate their risk tolerance. Gender, age, income, and working with a financial advisor are found to be more consistent descriptors of portfolio risk compared to risk-tolerance miscalibration.