Greg Davies, head of Behavioural Finance at Oxford Risk, explains why wealth managers must resist the temptation to focus on user experience at the expense of a sound methodology in risk-profiling – and why these invaluable client data must not be allowed to fall through the cracks.

“Stupidity well packaged can sound like wisdom,” wrote Burton Malkiel in A Random Walk Down Wall Street.  It is a lesson well-learnt, and well-used throughout financial services, albeit not always for well-meaning purposes.

Common approaches to risk-profiling have quickly gone from nowhere to temptingly well-packaged triviality, but all too often have forgotten to stop and pick up a sound scientific methodology along the way.

There are plenty of ways to do risk-profiling poorly. One of the latest is potentially the most dangerous, because on the surface, it looks like a great idea.

Playtime is over
“Gamification – increasing user engagement by improving the user experience, specifically by incorporating techniques from games – is rightly a mainstay of behaviour-change protocols. In a complex and, to many, mundane field like financial suitability, not using some gamification techniques feels like an unforgivable oversight.

However, such temptation should signal caution. Gamification is great for engagement, but the techniques alone are not enough.

At Oxford Risk, we embrace the techniques of gamification wherever we can – particularly in the design of user interfaces to enhance client engagement and experience. However, we never gamify at the expense of accuracy. The game is to enhance engagement, not sell snake oil. Gimmicky games trivialise risk tolerance, they do not test it.

There is a time for simplifying, and a time for science. For example, some “tests” favour using the sort of individually intriguing but scientifically vacuous influence of a user’s past investment actions, or even a self-assessment of their risk tolerance. Users like this because it attaches a psychologically meaningful narrative to their past actions, but academics dislike it because it adds nothing, while taking away validity, integrity, and relevance – and it can end up “optimising” for precisely the behaviours we want to guard against.

Form should follow function, not replace it; if you are not measuring what you’re supposed to be measuring, the playfulness of your polish doesn’t matter