“What is necessary to change a person is to change his awareness of himself.”
“The final mystery is oneself.”
If you’ve ever taken one of those online financial assessments, you’ll know that you’re asked questions about yourself. Most of them are either demographic – how old are you, are you married, etc. – or they’re financial – how much do you earn, how much do you have invested, when do you want to retire, etc. However, there are a couple of questions that are designed, supposedly, to help you measure your risk tolerance.
How would you perceive a 20% drop in the stock market?
I like for my portfolio to be aggressive/conservative/random choices.
All of these questions are designed to help an advisor determine just what sort of asset allocation you should have. If you’re risk averse and would run for the hills at the first sign of a downturn, then you should have a more conservative portfolio. If you’re risk-seeking and liken your portfolio to the thrills you get from jumping off of the Stratosphere in Las Vegas, then you may want to invest in all penny stocks (I am not recommending this course of action, for the record).
These risk questionnaires make two fallacious assumptions about your own knowledge of and mastery over Monkey Brain, what I call your limbic system.
- You know thyself as well as you think that you know thyself, and
- You should adjust your investments for your own behavioral biases rather than for time-tested quantitative reasons.
In this article, we’ll see why both are fallacious assumptions.