Game theory revolutionises risk profiling

The gamification of risk profiling is rising in Australia with the launch of a platform already being used by several advice groups.

United States-based behavioural economics, decision science and financial technology firm Capital Preferences has developed a SaaS (Software as a Service) behavioural profiling and portfolio assessment platform, TrueProfile. It replaces client questionnaires and other traditional data collection methods with game theory and behavioural economics.

Invented by former University of California Berkeley Economics Department chair Shachar Kariv, TrueProfile is built on the reality that clients cannot accurately state their risk preferences but are able to show you the risks they would be willing to take.

Capital Preferences states: "The client experience is gamified and reveals, in minutes, how customers behave when facing risk, spending choices and their goal priorities.  Streamlining the acquisition and assessment of clients creates efficiencies, a more robust value proposition and deeper client understanding for advisers."

The first product available is TrueProfile Risk Essentials, which provides an understanding of a client's loss aversion, risk tolerance and decision consistency.  It calculates a client's tolerance for risk, loss aversion and decision-making consistency with statistical confidence before ranking an adviser's range of asset allocation models using a FitScore.

"Loss aversion is one of the silent killers.  Some clients are both risk tolerant and loss averse. You don't see it in a client until it's too late - loss averse clients feel every dollar lost with a greater intensity," Kariv said.

Capital Preferences chief executive Bernard Del Rey added that being able to pinpoint loss aversion and the level of consistency in a consumer's decision-making is a real breakthrough.

"You can immediately add to your compliance safeguards by identifying those clients who need extra help because of inconsistent decision making," he said.

The business has seen pre-launch adoption of the platform in Australia, having already been beta tested by Paragem, Affinia and Henderson Maxwell.

"We all know clients can't tell us their risk tolerance, or how loss averse they are, or if they have trouble saving. It doesn't get better by simply asking more or different questions.  This research enables client actions which tell you far more than their words," Paragem chief executive, Ian Knox said.

Affinia chief executive Marcus O'Sullivan said advisers responded positively to the TrueProfile platform and is looking forward to rolling the solution out more extensively to the Affinia network.

Read more: TrueProfileAffiniaCapital Preferencesrisk profilingParagemShachar KarivBernard Del ReyHenderson MaxwellIan Knoxfinancial planningfinancial adviceMarcus O'Sullivan
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