Risk Tolerance Is A Mood

A friend filled out a risk questionnaire on a quiet Sunday afternoon. Twelve questions, a score, one word at the end. Aggressive. He ticked the box that said he could sit through a 30 percent drop, so it pointed him at 90 percent equities, and he went with it.

Then March arrived. His pot was down about 3 lakh. And the same man who had calmly ticked that box was on the phone asking me how fast he could sell the lot.

Nothing about his plan had changed between Sunday and March. His mood had. And his mood, it turns out, was the thing the quiz actually measured.

Here is what most risk profiling gets wrong. It treats your tolerance as a fixed trait, a number you carry around like your height. It is not. It is a reading, and the reading moves with the weather.

This is measured, not a feeling of mine. Guiso, Sapienza and Zingales followed a bank's clients straight through the 2008 crash and found their risk aversion rose sharply afterwards, and they sold stock. The trigger was not a fall in their wealth. It was fear. Malmendier and Nagel went wider and found the returns you personally live through reset your appetite for risk, recent scars weigh the most, and the effect lingers for decades.

So the profile you fill in feeling calm is answered by a different person than the one who shows up on a red morning.

The fix is not a cleverer questionnaire. It is a better question. Ask it in rupees, not percentages. A 30 percent drop is an abstraction you nod along to. 3 lakh gone from 10, this quarter, is the real thing. If the rupee figure makes you flinch, that is your answer. Pick the mix your red-Monday self will actually hold, write the number down, and check it again after every big move.

Find your real risk fit before you pick: