Understanding Financial Risk Tolerance. Institutional, Behavioral and Normative Dimensions

This book focuses on the contribution of financial risk tolerance in shaping the workings of financial markets. It combines very different views to understand how this concept, lying at the crossroads of different domains of study and practice, including financial regulation, scholarly studies, and financial advisory practice, has been formalized over the last 30 years. The book looks at the feedback loop among the different domains in which risk tolerance is assessed and operationalized to reorganize the current stream of research on financial risk tolerance and suggests further relevant domains in which a new risk tolerance definition will need to be defined. Using key landmark moments in the normative evolution of financial services in the European Union (MiFID and MiFID 2), this book highlights the relationship between scholarly definitions of risk tolerance, key measurement tools, and the formal requirements imposed by regulatory institutions to key market players. This book provides a snapshot of the most important dimensions in which financial risk tolerance has been analyzed and highlights the relationship between policy-making and scientific endeavor. We touch upon precursors of financial risk tolerance, reviewing key socio-demographic variables, and move on toward more dynamic versions of financial risk tolerance that include the role of life events. The different chapters focus on the debate on financial risk tolerance in specific time frames marked by regulatory events and provide an in-depth overview of two important changes in European financial markets—sustainable investment and fintech and robo advisory. A practitioner’s view section authored by the CEO of a UK-based investment firm is included as a commentary and includes relevant insights from the world of financial advisory tied to the academic debate discussed in the text.