The Hidden Danger of Couples with Incoherent Risk Preferences


DateOct 1st, 2021


Stephen Striegel

Read time 3 minutes

In this post:

  • What it means for couples to have low Decision Consistency
  • Detecting low Decision Consistency in couples, and what to do about it

We have found that 5-10% of couples have at least one partner with incoherent risk preferences—and that represents a hidden danger, both for the clients and for the advisor.

What it means for couples to have low Decision Consistency?

Capital Preferences recently completed a study where we profiled the risk preferences of 190 couples (n = 380) in the United States. In the study, each couple filled out a survey where they answered questions about demographics, the financial decision-making dynamic in their household, what they believe to be their own and their partner’s risk attitude, and the quality of their financial advisor relationship.

Each individual participant also completed an activity which employs Revealed Preferences to calculate their Risk Tolerance, Loss Aversion, and Decision Consistency scores. In this blog post, we’re going to focus on the Decision Consistency results that we uncovered.

Decision Consistency measures a person’s “economic rationality”–in other words, how coherent and well-ordered a person’s risk preferences are. People with low Decision Consistency scores show preferences that contradict each other, meaning that their investment decisions are not consistent across different scenarios of risk and return. This is an indicator that the person needs extra education and care in the financial planning process.

In our study, we found that 11% of couples have at least one member with low Decision Consistency scores.[i] Among these cases, 76% of the time, the partner with low Decision Consistency is either co-equal or mostly in charge of making investment decisions for the couple. These are people that don’t have clear risk preferences, which is a major impediment for achieving financial goals and building wealth as a couple.

These people are also a compliance risk for advisors who work with them. After all, it’s difficult to gauge suitability for clients with incoherent risk preferences.

Detecting low Decision Consistency in couples, and what to do about it

Prevailing methods of risk profiling are incapable of measuring Decision Consistency. Risk-tolerance-questionnaires weren’t designed to do the precise measurement required. The only surefire way to identify which clients have low Decision Consistency is to use behavioral client profiling methods, such as Revealed Preferences, to mathematically assess which clients are economically irrational. These couples require greater education and hands-on management from an advisor.

To protect vulnerable clients and the firm, advisors cannot afford to overlook the Decision Consistency of their clients. It’s especially important when combining the perspectives of two partners into a plan that helps them build wealth and achieve their financial dreams…all while ensuring both are comfortable with the risks they are taking.

*We estimate the true figure to be closer to 5%-6% in a “production” environment (i.e., with real clients). Why? From Capital Preferences production data, we observe around 3% of individual investors show low Decision Consistency. In a couples context, this 3% figure for individuals would translate to approximately 5% of couples where at least one partner would show low Decision Consistency.

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About author

Stephen Striegel

Based in the United States, Stephen works across Customer Success, Marketing, and Sales at Capital Preferences, promoting CP’s research and suite of products to the global market.

He holds degrees in Economics and English from Villanova University, as well as experience consulting in the decision science and data analytics industries.