Financial advisors are held to high regulatory standards in the provision of financial advice to clients. Since the market crash brought about by the financial crisis of 2008, the questions of risk-tolerance, capacity for loss and investment suitability have come into focus as regulators seek to ensure investors are protected and the financial system is secure.

Capital Preferences offers four scientific tests that consistently and confidently profile clients, addressing those critical questions of risk-tolerance, capacity for loss and investment suitability. These tests are designed using a “game” approach that simplifies the process of information exchange between the advisor and client.

Our primary methodological contribution is thus an experimental technique (the game) that enables us to collect richer data about a client’s choice under uncertainty than has heretofore been possible.

Aside from pure technicalities, our graphical computer interface provides several important innovations over previous work. Most importantly, previous experimental studies have inferred preferences from a small number of individual decisions and hence have been forced to set up relatively extreme choice scenarios. In contrast, we collect many observations per subject.

This enables us to analyze preferences at the individual level. This is crucial since individual heterogeneity requires behavior to be examined at an individual level in order to properly examine preferences