Mind the gap. Inconsistencies between subjective and objective financial risk tolerance

Investors’ financial risk tolerance is crucial in the formulation of suitable financial advice; in the past, assessment efforts relied on multiple approaches and techniques but their consistency is still an issue. We focus on two metrics traditionally proposed (self-assessment and portfolio composition) and we test their mutual consistency with an innovative methodology applied to a sample of 2,374 investors. Our approach innovatively allows us to discriminate between inconsistencies due to wrong portfolio compositions and those arising from wrong self-assessments. We show that low financial literacy, high income, no children and incautious economic behavior are commonly associated with such inconsistencies.