What is a psychometric questionnaire and why is it used to assess Risk Tolerance?

Psychometric questionnaires are designed to assess a certain aspect of psychology and express it on a stable, measurable, scale, such that one person can be compared with others.

Willingness to take investment risk is a relatively table psychological trait, and therefore well-suited to being measured by a psychometric questionnaire.

Psychometric approaches are much more reliable for assessing long-term Risk Tolerance than the subjective assessment of either the client or their adviser.

Numerous studies have shown that individuals have only a very small knowledge of others against which to compare themselves, and advisers are heavily prone to skewing their assessments of their clients towards the adviser’s own attitudes to investment risk.