Risk Appetite

Abstract

Our article firstly examines to what extent empirical research confirms the model of decision making based on a stable utility function. To this end, we have summarised the fundamental theoretical correlations relating to risk appetite, then went on to present the main results of behavioural research, with special focus on prospect theory, the correlations between socio-demographic and cognitive characteristics and risk propensity, as well as other influencing physical, mental and psychological factors. Our other research question based on this was whether there are accepted theoretical and methodological guidelines as to what methods an advisor should employ to become familiar with the customer’s risk-taking behaviour and how the subsequent advisory process should be conducted. We first reviewed the methods used in international practice to determine risk appetite as well as the criticisms these drew in relevant literature and then determined that for the time being, in advisory practice not only is it unclear which method is most suitable to gauge investors’ risk appetite, but also to what extent the advisor must accept or direct the customer’s risk preferences during the establishment of the investment strategy.