Module 4 (Client Risk Tolerance) Flashcards
Risk is defined as the _______________ of loss.
possibility
The difference between risk and uncertainty?
Risk can be measured and uncertainty cannot be measured.
Someone that is always willing to except risk and will prefer uncertain outcomes over certain outcomes.
risk seekers
Someone that is willing to assume risk only when they believe it will put them in a better position then if they would have not accepted the risk.
risk indifferent
Someone who is willing to accept some level risk or even reject risk altogether.
risk averters
Studies have shown that people would rather have a small return on their investment, that they know they will get, versus an…
uncertain large gain that they don’t know that they’re going to get.
Studies have shown that individuals would rather have a certain small gain versus…
An uncertain large gain.
Studies have shown that individuals rather have a large uncertain loss versus…
Small certain loss.
Recent evidence suggests that people tend to be _____________ rational when dealing with investment solutions.
less than
When people are making decisions about investments what are their decisions influenced by?
Their emotions
This indicates there are limits as to how rational and individual could possibly be. What is it called?
bounded rationality
Most individuals generally will not stop being rational when making decisions involving risk. True or false?
Yes. Most people will generally be unrational when making investment decisions.
Do most people tend to be overconfident in their judgments?
Yes
Typically, people will use as much information as they can to make an investment decision. True or false?
False. People tend to use less information to make decisions.
You get people enough facts they would generally make a decision that’s more accurate. True or false?
False. Even if you get people more information they generally will not improve the accuracy of the decision.
How do people ignore the law of large numbers?
By making their decisions on small sample groups.
Individual investors place too much importance on…
Short-term economic developments.
When someone refuses to believe that a statistic applies to them and will be reluctant to purchase insurance. These individuals are generally…
in denial of risk.
Research indicates individuals place a higher value on completely eliminating risk as opposed to…
Just reducing the level of risk.
This causes individuals to overestimate risk when events are easy to imagine or recall. It’s usually influenced by media coverage.
availability bias
This is when someone will be fear unfamiliar with more than they will fear risk that is familiar.
familiarity bias
When someone overestimate The risk of flying because the news recently reported an airplane crash.
availability bias
One someone will overestimate the risk of dying from a disease because their friend recently died of cancer.
availability bias
When a US investor is unfamiliar with foreign investments, and will overestimate the risk associated with foreign investments.
familiarity bias
When someone underestimate risk because they feel they have control over the situation.
illusion of control bias
When someone underestimates the risk of driving a car and overestimates the chance of being in a plane crash.
illusion of control bias
When someone will place different values on a money depending on the situation.
mental accounts
When someone will drive 15 miles out of their way to save $10 on a $30 shirt but will not drive 50 miles to save $10 on $150 jacket.
mental accounts
When individuals will take on more risk if they have more time for the investment to pan out.
time horizon
When people will be less risky with their investments if it affects other people that are close to them.
group dynamics
When someone is in a good mood and will make more risky investment choices.
Mood
When alcohol consumption causes individuals to take greater risk.
Alcohol
The risk of investment loss
Monetary risk
The risk of injury or loss of life
Physical risk
The risk of loss of respect from your peers
Social risk
The risk of compromising your standards
Ethical risk
Monetary risk takers typically make their own…
Investment decisions
What are the four elements of a monetary risk taker?
– Under estimate risk
– Optimistic and enjoy change
– Requires a little time to make major decisions
– Prefers uncertainty and variability
Someone that is risk tolerant in every area of their life.
Thrill Seeker
What are the characteristics of a thrillseeker?
– Hates routines – Makes emotional decisions – Outgoing and spontaneous – Enjoy loud parties – Quick decision maker – Most common in men
What are the behaviors that you normally can see with risk takers?
– Gravitate towards private-sector jobs
– Change jobs frequently
– Tend to be Fessional’s
– Hold more senior-level positions
– Their jobs usually are based on commissions
– those in small firms tend to be more risk tolerant than those in large firms
People with high education tend to be less risky or more risky?
more risky
When people get older, do they tend to be more risky or less risky?
Less risky
Are men more risky or women more risky?
Men are more risky
Is the firstborn child or the last child more risky in decision-making?
The last child is more riskier
Are married people or unmarried people more risky?
Unmarried people are more risky
What are some things that advisor should be thinking about when creating an assessment for their clients?
– Monetary risk-taking
– Get their clients demographic information and personality traits
– Assume that their client is risk adverse
– Remember that most people will over state their risk tolerance
– know that some people are not willing to cut their losses.
When measuring a clients risk tolerance, what are the four factors that in advisor should consider?
– Investment objectives
– Client investment preferences
– Real life choices involving rest
– Attitude towards risk
What are the seven characteristics of someone that is willing to take on a lot of risk?
- Aggressive investment portfolio
- High ratio of debt
- Net worth used for gambling
- Lots of job changes
- large insurance deductible
- Variable mortgage plan instead of a fixed mortgage plan
- Variations in year to year income
When asking a client about their attitude towards risk, what are the dangers that you could see?
– They might over state their wrist tolerance
– Their attitude may give you the false impression of their actual behavior towards risk
– You may not ask enough questions to get the information you need
The higher the clients ratio of life insurance to their salary, the lower their…
Risk tolerance.
