Your Tolerance for Investment Risk Is Probably Not What You Think

Anybody who has ever been to a financial adviser knows the drill. The adviser begins by asking you to fill out a questionnaire, aimed at getting at a key measure: your appetite for risk. By knowing how much risk you’re able to tolerate, the adviser knows how much you’re willing to lose to get where you want to go. The adviser can then construct a portfolio that reflects your risk tolerance. Pretty simple, no? If only. The truth is that the questions advisers ask often don’t measure what they purport to. Instead, they take all sorts of different concepts—such as regret, fear and overconfidence—and they lump them all together under this vague concept called risk. Each of those things is worth

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