The joint influence of financial risk perception and risk tolerance on individual investment decision‐making

TLDR

The growing complexity of the investment environment has heightened the need for high‑quality financial advice, which hinges on accurately assessing clients’ risk characteristics—traditionally measured only by risk tolerance and not by risk perception. The study investigates whether relying solely on risk tolerance omits critical aspects of a client’s risk profile by examining both risk tolerance and risk perception in investment decision‑making. Using an online survey of 364 Australian financial adviser clients, the authors show that risk tolerance directly and indirectly (via risk perception) shapes risky‑asset allocation. The findings demonstrate that both risk tolerance and risk perception jointly influence investment decisions, underscoring the need to assess both constructs and validating a new comprehensive risk‑perception measure for financial advice.

Abstract

Abstract The increasing complexity of the investment environment has accelerated the need for better quality financial advice services. Central to quality advice is advisers’ accurate assessment of their clients’ risk characteristics. Typically a client's risk characteristic is assessed by measuring the client's risk tolerance but not risk perception. To assess whether this practice fails to fully capture the client's risk profile, we explore both risk tolerance and risk perception in the investment decision‐making context. Using Australian online survey data of financial adviser clients ( n = 364), our results reveal that risk tolerance influences risky‐asset allocation directly and indirectly through risk perception. These results thus clarify the joint role of both risk constructs in the investment making decision and highlight the importance of assessing both in the provision of client financial advice services. Importantly, our results validate a new comprehensive risk perception measure applicable in the financial advice context.