Behavioral Finance

facial recognition

Identity Hacked From Just Your Picture

Facial Recognition software tools marketed by businesses such as Faception and Decipher claim to be able to identify an individual’s personality and behavior. They state that from a photo they are able to determine if the person could be a terrorists or pedophile. Further, their claim is that photos can identify likely poker or bingo winners. Mattersight goes one step further and makes the same claims using both video facial recognition and voice. (Photo Credit: Shriver Claes/Penn State)

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The individuals categorized in this way have likely played no part in providing in-depth information about themselves. They will not have completed a validated and sophisticated discovery process. They simply had their photo taken.

I’ve watched movies portray how law enforcement uses facial recognition to identify/locate a person already in their data base, but to randomly take photos from which a personality and behavior can be determined? Seems like science fiction. It could also be argued – it is discriminatory. In their 2016 article, The Underlying Bias of Facial Recognition systems, Clare Garvie and Jonathan Frankle at the Center on Privacy & Technology at Georgetown Law, outline the potential issues of bias around facial-recognition software. They state that depending on how algorithms are trained, they could be more accurate when identifying white faces than African American ones.

Of course, there will always be a place in society for tools that keep us safe. Maybe facial recognition will one day play its part. But along with Big Data gathering, if one under scrutiny is not involved in the process and have not completed a validated questionnaire, there is no way a tool such as this can uncover a person’s personality.

Cetera Financial Group CEO Robert Moore believes that facial recognition software (referring to Decipher) will provide a faster and more accurate read of a client’s risk tolerance and financial behavior than any questionnaire ever could.

Some questions to consider:

1. How will facial recognition tools predict individual’s reaction under pressure?
2. How will they predict the degree to which they will tolerate risk?
3. How will they understand their communication style?
4. What will be revealed about the individual’s ability to build relationships?
5. Are they more likely to be a loner/reclusive or the life of the party?
6. How will facial recognition determine my approach to wealth creation?

None of these facets can be revealed through facial recognition. Some through Big Data, but ALL with a robust highly validated process such as DNA Behavior Natural Discovery.

I’m all for innovation and new technology. I’m part of it. Our DNA Behavior platform is the world’s only all-in-one cloud-based behavioral analytics platform to know, engage and grow both employees and clients using all the dimensions of a person’s personality.

But facial recognition cannot reveal the true me. Yesterday I had a tooth extraction, my face was very swollen. I wonder what a photo of me would have predicted? Further, think of twins, I have a few twins and indeed triplets in my world and, as a behavioral analyst, I can tell you that neither group has the same personality or behavior.
This is me, this is my personality. My face won’t reveal this.


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We all make judgments when first we meet someone – often based on appearance. We then get to know them, and on some occasions don’t like what we see – or vice versa.


As Pedro Domingos, a professor of computer science at the University of Washington, said to the Washington Post, Can I predict that you’re an axe murderer by looking at your face and therefore should I arrest you? You can see how this would be controversial.

Princeton psychology professor Alexander Todorov told the Washington Post, The evidence that there is accuracy in these judgments (referring specifically to Faception) is extremely weak.


In conclusion – you’ll get to know more about me through a robust questionnaire than taking my photo.

To learn more, please speak with one of our DNA Behavior Specialists (LiveChat), email, or visit DNA Behavior

Data Mining2

Behaviorally Smart Data Mining – for Financial Advisors

The explosion of available information from social media, together with significant techniques for capturing this data, now provides financial advisors with a gold mine of information to help them identify and connect with clients.

Big Data gathering is only a starting point in terms of capturing user behavior. It delivers a glimpse of the client but leaves a significant gap and won’t offer enough insight to be able to advise or offer solutions to clients based upon their life goals.

DNA Behavior International fills the gap. With the use of behavioral psychological insights, revealed through a validated questionnaire, their powerful DNA behavioral intelligence, partnered with their Big Data Optimization program enriches firms employee and client data.

IBM in their Big Data and Analytics Hub ask these questions: Are you (financial advisor) generating targeted personalized offers for your clients? Do you know your customers and provide them with timely, relevant and optimized offers based on data-driven insights? By leveraging information about your clients’ behaviors, needs, and preferences, you can encourage high response rates from clients and enhanced relationships with them.

Client Insight for Wealth Management

When financial advisors use Big Data to enhance their service offering – what are they extracting from the data? How are they interpreting it? What is it saying about potential clients? Will clients be concerned that they are being advised based on their social media accounts alone?

Financial advisors who mine social media to serve client’s life events should know this does not reveal personality or bias. It doesn’t uncover decision making styles. It won’t predict a reaction to market mood. It won’t reveal influencing life events.

Advisors who are behaviorally smart understand there is a gap in Big Data mining. They know the importance of guiding clients with wisdom to self-discover who they are and their priorities to achieve financial wholeness. Financial DNA discovery delivers this self-discovery process. This strong, validated, structured approach reveals all dimensions of a client’s financial personality.
A partnership between behavioral analytics that reveal personality and big data offers financial advisors a significant key to identifying clients and delivering accurate advice.

As quickly as Big Data mining was the key to understanding customers now the added requirement is for financial advisors to be able to use cognitive and analytics to understand their clients.

Gauthier Vincent head of Deloitte’s US Wealth management consulting business is quoted in the Financial Times: Tools that help manage interactions with clients will soon be able to analyze data such as a client’s social media activity to work out their investment goals and advisers are thinking. There’s a lot of info out there I would love to have to create rich profiles of prospects so I can increase the odds of success when I [contact] them.

Hugh Massie

Well said – but Big Data will only ever become a significant tool for financial advisors when it shares its platform with a financial personality discovery process such as Financial DNA.

To learn more, please speak with one of our DNA Behavior Specialists (LiveChat), email, or visit DNA Behavior.


Why Some Entrepreneurs Crash and Burn

The New York Times covers several aspects of the Uber CEO Travis Kalanick’s demise. It references the culture in the organization, speed of growth, shareholder concerns, and the aggressiveness of the leader.

In specific, it highlights Kalanick’s pattern of risk taking and references his lack of integrity. For example, the many years where Uber engaged in a worldwide program to deceive authorities in markets where its low-cost ride-hailing service was resisted by law enforcement or, in some instances, had been banned.

In other reads, Kalanick’s unhinged confidence and competitiveness are hailed as examples of what makes him such a brilliant entrepreneur. Yet he is prone to trash-talking and tantrums, further revealing that his position as a CEO/Manager is highly suspect.

These observations highlight the fact that he is not self-aware and will continue to simply get in the way of his own success. Had he been behaviorally smart, he would have known that while entrepreneurs clearly need the talent to start a business, they also need much more to grow into successful CEO/Managers.

Kalanick says this about himself, “I must fundamentally change as a leader and grow up.”

But when an entrepreneur has a pattern of risk-taking and lack of integrity then continues to present himself as bullet-proof, the behavior results in poor management. This is where genius can become insanity and entrepreneurship crosses over into illicit behavior.


No single personality type makes up an entrepreneur – but there are wise steps that can be taken to manage the talents required to be a successful one. For example:

  • Managing creativity
  • Managing risk-taking
  • Developing innovation
  • Understanding personal EQ
  • Working with and through people

Highly innovative and creative individuals who see themselves as entrepreneurs (defined by as those who identify a need—independent of product, service, industry or market) should take seriously the need to understand their personality before venturing into starting a business.

The DNA Behavior Natural Discovery Process is a highly-validated discovery platform that predicts behavioral responses through identifying personality traits, attitudes about money, risk tolerances, and behavioral biases. Independent research shows DNA Behavior’s behavioral intelligence solutions lead to:

  • Closing the 60% engagement black hole caused by the relationship gaps in employee and client interactions
  • Increasing the suitability of client solutions offered to 99.75%
  • Improved employee productivity by up to 40% and increased revenue by over 23% a year
  • Identifying the 5% of employees who are potentially rogue, costing 5% of revenue in losses per year

As Travis Kalanick mourns his ignominious fall from grace, one thing is for sure – when he starts a new venture (and he will) his first step should be to understand how to manage his behaviors. And maybe then he can begin to understand why he thought the number one commandment he set for Uber employees was – Always Be Hustlin. Not the smartest of values to build a business upon, but a very clear indicator of the person who birthed the phrase.

To learn more, please speak with one of our DNA Behavior Specialists (LiveChat), email, or visit DNA Behavior.

donald trump

Trump Trauma, the Only Conversation in Town

Whether you are talking to your financial advisor, doctor, therapist, friend, partner or in line at the supermarket, somewhere the conversation will turn to President Trump.

Coping with significant change is difficult for most people. Then add a sense of disappointment in outcomes, and people feel unsettled.

When organizations make changes, the conversation around the coffee machine focuses on “What’s going on?”, “Are our jobs safe?”, And so on. We’ve all experienced this in some form or other. It’s somewhat different when there is a change of country leadership, the questions tend to be broader, “What’s going to happen to my investments?”, “Are we being led by a safe pair of hands?”, and so much more.

For most people change is never comfortable. It is, even more, trying to cope with if the change feels traumatic. Understanding our response to change is the first step to managing it. Everyone responds differently. Regardless of whether the change is in relationships, work environment or the Whitehouse, fear of the unknown can trap and even isolate us. We’re usually scared of change because were afraid of the unknown.

Soumya Karlamangla writing for the LA Times records that therapists are having a hard time talking to their patients when presented with concerns about Trump. At the most recent board meeting of the L.A. County Psychological Assn., therapists also discussed how to talk about Trump, especially with patients whose political beliefs might differ from their own. It turned into an hour long discussion that Hillary Goldsher, a therapist on the board, described as emotional, challenging, and difficult.

Thomas Coyle writing for the Financial Advisor IQ says in his article titled Talking to Clients about Trump, “for many financial advisors, U.S. President Donald Trump is a necessary topic of conversation with clients. It’s not that all FAs are especially eager to share their opinions of the White Houses latest tenant. Rather, advisors tell us, Trump is difficult to avoid in the context of long-term financial planning. They say the scope of his proposals, from renegotiating trade deals – to pushing for renewed infrastructure and reducing taxes – stands to impact portfolios whether these initiatives succeed, fail, or fizzle out.”

The US Presidential election is now over, Donald Trump won. Some will be excited about the outcome, others will be apprehensive. Whether we like it or not, it is what it is, and the question now is how to roll with the conversations taking place around us?

We all handle change in different ways. If we knew in advance how we are likely to react, we would navigate them much more effectively.

Those that embrace change will be excited, perhaps because they saw something of themselves in Donald Trump. They want to speak up and be provocative. Trump champions that for them. They want to throw society up in the air in the hopes that when it lands it will look different, be more caring, be fairer, be open to taking risks to achieve a better life for everyone. Trump champions that for them. Others will be having conversations about opportunities, taking risks, and becoming a great country again; their conversations will be about being a part of something different and unpredictable.

And how exciting to have someone who’s controversial? Speaks their mind? And Tweets!

But many people will be alarmed, disappointed, and maybe even fearful of a personality that seems larger than life. Some will be significantly concerned to seek therapy to talk about their fears; they may rush to their financial advisors to offload stock. They will find Trump’s outspokenness unsettling; they will be alarmed at the proposed speed of change.

Donald Trump is not the first to be controversial and certainly won’t be the last. President Theodore Roosevelt (in office 1901-1909) said that his office gave him a “bully pulpit” a powerful platform that lets him draw attention to key issues.

People who seek therapy and panic about their investments?are facing personal challenges for sure. This post-election distress is not to be laughed at. But for a while, these like-minded disappointed voters will group together and feed each other’s distress. But eventually, as is the way with human nature, they will begin to see the good stuff that impacts their lives, and the pendulum will begin to swing to a more balanced position.

Here are some pointers to managing a conversation about President Trump either with clients or anyone else who raises the conversation.

  • President Trump can cause a change in behaviors.
  • He has the ability to persuade and convince others.
  • He will stimulate conversation based on his vision.
  • He will set ambitious goals based on the vision and carry others along on the journey.
  • He will look for the quickest route to deliver success, and this might bring resistance from those whose decision making is more contemplative.
  • He will be prepared to take risks to achieve goals quickly and will understand, sometimes this will mean losses.

Yes, he can be emotional and impulsive and make decisions too quickly to get into an opportunity. Yes, he may act too early not recognizing a temporary downturn or slowdown is part of the growth journey; but President Trump needs to get to the bottom line quickly. Too much reliance on detail and the small print will frustrate him. However, learning how to pay attention to detail will be valuable to ensuring his enthusiasm is reigned in and that his spontaneity does not lead him into making poor choices.

He has the ability to draw people together, and can quickly harness appropriate skills and talents to implement plans and ideas. President Trump is able to channel diverse skill sets into delivering successful outcomes. As a multi-tasker, he needs to be presented with a range of opportunities to hold his attention. He needs information flow to be in a summary format with the bottom line clearly demonstrated.

We are all different, that’s what makes the world so fascinating. Personality is such an interesting topic. The way we communicate with each other, the way we deal with challenges (such as post-election trauma); our ability to take a risk; how we communicate with each other; how we manage our behaviors, all make for better conversations.

The DNA Behavior Natural Discovery process offers deep, accurate, highly validated insight into why we react the way we do in given environments. It delivers understanding on how to manage behavior gaps. As the world’s only all-in-one cloud-based behavioral analytics platform it reveals how to know, engage and grow every individual using all dimensions of a person’s personality traits.

I love what Jon Ten Haagen of Ten Haagen Financial Group in Huntington, N.Y., says in this quote, “my biggest Trump-related message to clients is turn off CNN and the talking heads because there is no interpreting what they are blabbing about. The man has not been in office for 100 days yet, he has a total of 1,459 days to accomplish what he wants to – or not.” Given the Trump administrations newness and the fact he’s a catalyst for controversy and pushback, Ten Haagen says, “clients should look at the economy and interest rates and consider what companies are doing and saying.”

Above all, Ten Haagen, who manages more than $30 million and is mostly paid with a trail, tells clients to look at the big picture and be diversified, advice he says holds true no matter who’s in the White House.

People tend to figure out what to do to feel secure again, financially, physically or psychologically. Understanding why we react or respond in the way we do is important and worth finding out more about.

To learn more, please speak with one of our DNA Behavior Specialists (LiveChat), email, or visit DNA Behavior.

Your kinds don't want your money

Your Kids Don’t Want Your Money!

UHNW global wealth is expected to reach $46.2 trillion US by 2020.

As many of these UHNW individuals reach their golden years there will be family conversations taking place that focus on the next generation and who will inherit what. Or will there be?

Rarely do we hear about or read articles that focus on wealth transfer conversations through the lens of the children. More often it’s the parent’s perspective; they make decisions for their children believing that they are setting them up for success. However, in many cases, the reading of the will is the first the kids hear of the parent’s plans.

Conversely, families that talk openly about money and have built a safe environment around the dinner table to discuss wealth, will have created a family dynamic within which succession planning is just one of many conversations.

Regardless the size of the family wealth, talking about dying, wills and inheritance within families is an emotional subject. Some family members cope well, others not so much. We all respond differently when under pressure, especially when emotions and close personal relationships are part of the scenario.

Families that have not made these topics part of normal family life will have a greater problem when estate planning becomes imminent. There will have been no discussion about preserving the inheritance. No consideration for the individual financial personalities of the inheritors. Families familiar with transferring generational wealth will have focused on training the next generation, listened to their whats and needs, and prepared each recipient based on their individual financial personality.

In the 2011 US Trust Research, their findings show that 84% of wealthy parents believed their children would benefit from meetings with financial advisors, but 59% had never even introduced their children to the advisors managing their assets. More than half had not fully disclosed their wealth to their children because they had not thought to do so.

By not communicating with their children:

  1. 60% of transitions failed due to a breakdown in communication and trust in the family unit
  2. 25% of failures in family wealth transfer were caused by inadequately prepared heirs
  3. 30% of family businesses survived to the 2nd generation and just 4% survived to the 3rd generation. Source: Independent Williams and Preisser Research

When discussing money and inheritance have not been part of normal family life, and heads of families believe they should be the main decision makers. The beneficiaries are left with no input. Many parents become overprotective of the family wealth, mainly because they read such statistics as the 70% failure rate when transferring family wealth from one generation to another, and the resulting loss of control of assets through mismanagement and poor investments.

The transition of wealth is very complex and in some cases, and can reveal ugly behavior. Family members are all different, so are their attitudes about money. No longer are the kids isolated from what is happening in the world; they understand far more than parents often give them credit for. Healthy conversations about money and estate management ensure children won’t feel entitled to wealth, or become lazy and count only on inheritance.

When families speak freely about estate planning they can head off difficult situations, one being that the children don’t want the inheritance. Instead, they may:

  1. build a successful financial life for themselves and don’t need the family money.
  2. not want the family home as it would cost them a fortune to modernize it.
  3. not be interested in the family business as they are too busy running their own.
  4. be teaching values to their own children, requiring them to build wealth through their own hard work and diligent saving.

As lives become more mobile, some young people don’t want to be tied down to possessions that don’t fit in with a more disposable, digitized, transient lifestyle.

A good starting point is to uncover and understand each family member’s financial personality. DNA Behavior International offers a significant suite of tools to facilitate this discovery. Based on the outcomes, conversations are significantly more focused on the proper approach to address all involved about the transfer of wealth. These insights set the course for the formulation of the DNA Family Continuity Planning Vision. A process within which all opinions are valued in the family succession planning process and promote family harmony.

Beneficiaries have the right to know in advance what their financial future is likely to look like, as not everyone will be happy to receive an inheritance or be able to manage the responsibilities that come with it. Family dynamics, values, the amount of wealth to be distributed, and the maturity level and financial personality of heirs can vary dramatically from family to family. Better to know this up front so that plans can be made accordingly.

Rich dinner table conversations build sustainable relationships across generations, and it all begins with understanding one other’s financial personality.

To learn more, please speak with one of our DNA Behavior Specialists (LiveChat), email, or visit DNA Behavior.

Big Data1

Can Big Data Make Risk Tolerance Questionnaires Obsolete?

This week, we remember a seminal event in the history of artificial intelligence. It was the twentieth anniversary of world chess champion Garry Kasparov’s loss to IBMs Deep Blue supercomputer.

I was fortunate to be in attendance when Kasparov gave a keynote speech at the 2017 Envestnet Advisor Summit, where he spoke about his latest book, Deep Thinking. The book is the first detailed account from Kasparov of his battle with the IBM machine as well as his recommendation that we should be prepared to adjust our lives to future advances in technology.

With every new encroachment of machines, the voices of panic and doubt are heard, and they are only getting louder today, Kasparov writes.

While the ability to play chess does not, in itself, make a computer as intelligent as a human, this milestone was just one in a long string of examples where a machine outperformed a human in a specific task. As more and more complex tasks are taken over by software, we should be looking ahead to the next breakthrough and considering the benefits as well as the potential drawbacks.

This started me thinking about how artificial intelligence combined with Big Data could improve wealth management. We have witnessed the automation of almost the entire end-to-end wealth management process, from proposal generation to new account opening, portfolio rebalancing, and performance reporting all the way through to billing.

But one key aspect has stubbornly remained a (mostly) manual process and highly dependent on human input: Risk tolerance questionnaires (RTQs).

The purpose of the RTQ is to create an accurate risk profile of the client, which becomes the primary factor in selecting their investments. Yet, the entire industry still forces clients to take what amounts to a multiple-choice pop quiz, one for which they have not studied but relies on their answers to build a portfolio that they may be invested in for decades.

Replacing RTQs has been on my mind for a while, and I have written about a number of reviews of different risk profiling software. Now seemed to be an excellent time to explore the idea of whether the concept the RTQ could, at some point, go the way of the Dodo.

The Sorry State of Risk Tolerance Questionnaires

My friend, Michael Kitces, wrote an aptly titled blog post, The Sorry State Of Risk Tolerance Questionnaires For Financial Advisors:risk tolerance questionnaire

the reality is that it’s difficult to measure the subjective aspects of risk tolerance itself, simply because it’s the representation of an abstract psychological trait in the first place. In other words, we can’t just objectively look into someone’s brain and figure out what their risk tolerance is. Instead, we have to ask questions, evaluate the responses, and try to figure out how clients feel about their willingness to take risky trade-offs, and how they perceive the risks around them.

Unfortunately, though, many risk tolerance questionnaires (RTQs) don’t actually do a very good job of helping to predict a client’s actual investment behavior during volatile markets, particularly when they ask about how the investor believes he/she would behave in the event of a significant financial loss. In part, this appears to be due to differences from one investor to the next as to what constitutes a risky and undesirable loss in the first place, which can be based on sometimes-arbitrary reference points.

Before we continue, let’s break out the three key components of the risk profile. I’m paraphrasing below from the Kitces article:

  • risk tolerance – the client’s willingness to take on risk
  • risk capacity – the client’s ability to endure a potential financial loss and still be able to achieve his/her goals
  • risk perception – the client’s understanding of how risky they think their investments are

There is a wide variety of risk profiling tools that all take varied approaches to the above components. Some focus primarily on risk tolerance, while others try to capture a combination of all three using different techniques. I’m going to skip all the details of the different techniques for assessing risk. Kitces does an excellent job of this in his article.

What we do know is that most risk tolerance questionnaires suffer from three problems:

  1. They are overly technical in nature;
  2. Response bias, which results in an investor responding differently when stressed;
  3. The difference between risk tolerance and risk capacity is not well-understood by clients or by many advisors, for that matter.

A 2012 study of risk tolerance questionnaires showed that many software products failed to accurately predict client behavior when the clients were under pressure.

What I would like to discuss is the possibility of automating the entire process and cutting the client out of the loop. Is this possible? If so, would it be recommended or would clients accept it? While some advisors and most of the software vendors are against it now, time and technology may soften their views.

To try and gather a range of opinions on this topic, I spoke with representatives from some of the leading providers of risk profiling software:

I was also able to speak with Thomas Oberlechner, Founder at FinPsy LLC, a consultancy specializing in behavioral research.

Can AI + Big Data Replace RTQs?

To restate my original question: Could artificial intelligence combined with big data provide a better understanding of an investor’s risk profile than a questionnaire?risk tolerance questionnaires

I’m thinking that companies like Yodlee, Quovo, etc. could provide access to an enormous quantity of very useful information about a prospective client. It could include the client’s entire investing history plus their personal finance history, including every transaction they ever made, and throw in social media, too. Could an algorithm be written to develop a personality profile for the client that would be a better representation of how they would deal with different market scenarios?

Let me begin the discussion with my favorite vendor response. This is from John Ndege of Pocket Risk:

We will have a manned mission to Mars before an algorithm replaces all risk profiling tools. Even with access to all the client data, it will take years (decades) to gain widespread trust and usage.

In response, a quote from Kasparov:

It’s remarkable how quickly we go from being skeptics to taking a new technology for granted. Given honest data, machines can make us into better decision makers.

How long did it take for us to switch from physical maps to GPS or to dump the Yellow Pages for Google? Not very long at all. Once we realize that a particular technological advance can perform a task faster, more accurately and/or with less effort, most people eventually accept it. Soon it becomes hard to remember what life was like without the technology. Anyone remember what it was like before smartphones were ubiquitous? (See How Risk Tolerance Software Is Disrupting Wealth Management)

Massie from Financial DNA agreed that technology cannot replace the questionnaire, but believes it can provide added value:

The right Big Data optimized with personality insights through an algorithm will provide a big leg up in the power and the ability to apply the behavioral insights across a whole data base of people. However, on its own it will not achieve the level of accuracy if a correctly structured pyschomterically designed questionnaire is used.

Can Humans Be Objective?

My original thought that an algorithm could do a better job at estimating someone’s risk profile was because of the extensive research that shows that humans are unable to answer financial questions objectively. Our innate biases always cloud our judgment.risk tolerance questionnaires

One of the challenges with RTQs is that they are heavily based on the individual’s personality, or perceived willingness to accept investment risk, explained Tolerisk’s Mark Friedenthal. [C]cognitive biases have been fairly well documented to suggest that a person’s recent experience (such as a positive or negative stock market or portfolio experience) will influence how they answer personality questions about taking risks, he noted.

In other words, Friedenthal believes there is no completely objective way to translate someone’s personality into a risk profile just by answering questions. This is why his software includes a client’s cash flows into the process.

As told by Kitces:

The situation is further complicated by the fact that when we take RTQs, we tend to answer the questions calmly and rationally, but when risky events occur, we may respond emotionally (literally using a different part of our brain). Known as the dual self or dual process theory, this disconnect between how we react to risky events in real time, and our (rational) expectation of how we will react, makes it challenging to simply ask consumers (in the hopes of getting a good answer) about their tolerance for taking future risks.

So, why not eliminate people from the process entirely? Why not go full machine?

Understanding The Data

Well, it may not be that easy to correlate the data with human intentions. Even if you have every financial transaction someone ever made, there is still ambiguity to deal with. How do you accurately translate transactions into an investor’s preferences risk tolerance questionnaires

As Aaron Klein of Riskalyze points out:

When you look at a log of trades, holdings or spending activity, are you looking at the client making their own decisions, or were those decisions executed by [an advisor] on behalf of a client? Does the client embrace that decision still, or do they regret it?
That’s the real problem, we see the answers to those questions are not evident in the records of transactions, and thus, it’s really difficult to ascribe risk tolerance to someone based on that data.

Even with the complexities of analyzing the data, there must still be a value to the data that can be mined by the right algorithm. Artificial intelligence has tremendous potential because of all the variables involved in determining risk capacity, Finmetrica’s Nunnally pointed out.

Nunnally continued:

It is very difficult to ask an investor how much risk they can afford to take in a questionnaire because most people don’t know. There are so many variables involved, including time horizon, and countless complexities that relate to future projections like investment returns, income over time, health concerns, etc. that it goes well beyond what the human mind can fully comprehend.

AI is able to crunch numbers and decipher patterns that can lead to investment optimization that far surpasses what humans are capable of.

The passage of time throughout the data set also needs to be taken into consideration. Some decisions to increase or decrease risk are prompted by changes in the expected time horizon of usage, Friedenthal noted.

While it is true that an investor’s decisions when he/she is 25 will be much different from those when they are 55, I think there still should be some way to adjust the results to compensate for this.

Computers Plus Humans = Something Better

Perhaps the answer is not computers alone, but a combination of human intelligence enhanced by machine intelligencerisk tolerance questionnaires

Soon after Deep Blue beat Garry Kasparov, a new type of chess tournament called freestyle became popular. In freestyle events, teams compete using any combination of humans and computers. Kasparov observed that the teams of human plus machine dominated even the strongest computers.

This is echoed by Massie from Financial DNA:

The holy grail of behavioral insight is aligning and blending demographic and financial related big data (the external view of the client) and psychometrically measured personality traits (the internal view of the client), and then deploying tools to utilize the blended information to guide the planning process.

Massie believes that firms could leverage big data to give advisors a head start on knowing the client during the prospect phase. But he warns against building the planning process solely on data:

The advisor/firm will never know the complete picture until they have the client complete a psychometrically designed assessment, which if structured correctly will provide a strong insight to client emotions. Two clients can have similar Big Data attributes but a very different personality, which means they need to be communicated with differently and offered different solutions to meet different risk profiles and suitability requirements.

(See 3 Ways Personality Testing Crushes Risk Tolerance Questionnaires)

Thomas Oberlechner from FinPsy LLC also insisted that computer learning and expansive databases must be combined with specialized questionnaires in order to be effective at determining an investor’s?underlying behavioral traits and tendencies:

These are two main pathways to determine behavioral characteristics, both of individuals and of companies. You can collect new information by asking directly (for example using surveys) and you can analyze existing expressions or symptoms of past behavior. These two layers of information, explicit and implicit, complement each other. Moreover, possible differences between the two are actually important in understanding risk tendencies and dispositions more fully.

Of course Big Data analysis and AI can help determine behavioral characteristics and preferences. But you need to be able to integrate statistical applications with behavioral science expertise (personality, individual differences, motivation and cognition) to generate the most meaningful insight.

I’m not surprised that firms whose main product or service is built around questionnaires, either behavioral, psychometric or otherwise, are insisting that machines cannot replace them, but must be used in conjunction with them.

Friedenthal offered an alternative option:

Perhaps the better usage of [big] data might be in objectively analyzing savings and spending patterns. Consider that a thoughtful analysis of risk tolerance includes not only a measurement of personality (willingness to accept risk) but also the expected chronology of cash-flows (ability to take risk). Individuals often represent expected cash-flows based on memory and not a data driven account of their actual inflows and outflows. These imperfections may contribute to inaccurate analysis of their ability to take risk, which translates to a sub-optimal risk directive.

If your risk profiling process includes asking the client about their cash flows, then having direct access to their investment and bank accounts would provide you with much more accurate data than the person could provide from memory.

The Future is Now

To demonstrate that this concept is not as far in the future as some people think, Massie noted that his firm has already developed some algorithms for calculating an investor’s risk tolerance and risk capacity based on their financial history. They have even performed some analysis on the accuracy of the results, as Massie reported:

Big Data can predict [risk tolerance] to around a 30% level if the right Big Data attributes are used, although this can be increased to up to 60% if there is some data base optimization using behavioral insights. However, adding a correctly structured RTQ to the mix will lift the accuracy to 80%+

This is exciting news! No word on whether Massie’s firm is planning to deploy these new algorithms or if they are just an experiment. But one thing is clear, if they are released, they will be as a compliment to questionnaires, not a replacement for them.

Massie stated:

Overall, we do not think that RTQs should be eliminated as they reflect the internal view of the investor’s risk tolerance. Big Data (if accurate) will reflect the external view and particularly [the investor's] financial capacity. So, the RTQ and Big Data are designed to measure different risk profile elements. If both are used in tandem it would be a lot more helpful than if only one or the other were done.

Finmetrica’s Nunnally agrees that RTQs should stay:

At this point in the evolution of AI, an algorithm may be able to analyze transactional data to develop a profile relative to an investor’s personal financial history, but it cannot truly understand the emotional and psychological aspects that are uncovered through the course of a conversation (between the advisor and client]. In that regard, risk tolerance assessment is best served through a RTQ that is centered on human interaction.

A New Age of Human and Computer Cooperation

This is the point of the article where I usually include some generic statements about not being able to know what the future holds or if things continue this way we might see a major change, but then again it’s possible that everything will remain the same.

Not this time.

I’m going to predict that we will see some form of Big Data analytics included in risk profiling software becoming mainstream within the next 3-5 years. It will be a blending of questionnaires, data analysis and advisor insight to create a risk profile.

Even though only Financial DNA said they actually had something ready, all of the other vendors said that they were doing research into this area. If Financial DNA’s product starts to take off and becomes a reason that firms switch from competing products, we will quickly see a wave of similar product announcements.

I will leave you with this quote from Michael Kitces, the greatest opportunity of improving risk tolerance questionnaires and overall risk profiling may be the way it helps financial advisors to better manage ongoing client relationships.

All of this software should be focused on helping the advisor to improve the overall client experience. Isn’t that what it is all about?