What if the client’s answers are inaccurate? Not intentionally inaccurate, but instead wrong because they’re incomplete.
Behavioral finance researchers at Santa Clara University found this to be the case after surveying about 2,500 consumers. What the researchers concluded is too often missing from the financial advisor’s analysis of a prospective investor’s risk tolerance could be missing from your analyses. Yet in many retailing endeavors, the shopper’s risk tolerance influences how you can best deliver value to the consumer and market your offerings.
Here’s my adaptation of the SCU researchers’ suggestions to all retailing:
- Before assessing risk tolerance, know the type of risks the purchase probably has and the importance in minimizing risk for this type of purchase. The purchase of a financial product involves monetary risk about which a consumer is likely to be highly concerned. Buying groceries at a familiar store involves maybe physical risk because of food safety and maybe social risk for status-oriented goods, with the consumer usually not highly concerned about either.
- Find out the consumer’s objectives. People have a variety of objectives for spending their money and time. In general, the sooner merchandise or services are to be used, the lower the risk tolerance. However, the SCU researchers say an investor’s risk tolerance for a retirement account to be used in the distant future might be very low.
- What is this consumer’s perception of prior success with this type of purchase for this type of objective? The SCU researchers say that investors who had success with dot-com stocks in 1999 or gold more recently may very well have an unrealistically high risk tolerance fueled by exuberance. The opposite would hold for consumers who held international stocks in their portfolio during 2008.
- Assess the consumer’s degree of confidence and propensity for regret. As you inquire about prior experiences, does your shopper psychologically beat himself about the head and body about mistakes and missed opportunities? If so, take whatever the shopper says is their degree of risk tolerance and push it a little lower. This way, the recommendation you make to the shopper based on risk tolerance will be better welcomed. If you sense overconfidence, also correct for this by lowering your estimate of the true risk tolerance.
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