Inconsistencies in Risk Assessment from Format-Related Factors
Investment suitability depends greatly on transparent and consistent portfolio presentation. Inconsistencies in content and format can significantly impact decision-making, shaping investors’ risk perception and risk tolerance. Such discrepancies may lead to suboptimal investment choices, inaccurate portfolio attribution, greater-than-expected losses, and ultimately, investor dissatisfaction.
Format Inconsistency
Investment suitability relies heavily on transparent and consistent portfolio presentation. Format inconsistencies can skew investor interpretations affecting risk perception and tolerance in investment suitability assessments, and potentially resulting in suboptimal investment choices and greater-than-expected losses.
1. Net or Cumulative Returns
Returns are presented either as net (standalone) or cumulative (adjusting the initial investment).

Issues:
- Returns Salience: The presentation of returns as either net or cumulative can bias investors’ perception of portfolio performance. Cumulative returns may make losses seem less significant, while net returns highlight individual gains and losses more clearly, potentially leading to differing assessments of risk. This discrepancy in perception could influence decision-making, as investors may favour portfolios with cumulative returns for their smoother trajectory, potentially overlooking underlying risks.
2. Percentages or Currency
Returns are presented either as percentages or currency.

Issues:
- Change in Value vs. Actual Gains and Losses: When gains and losses are shown as percentages, investors see relative changes over time, such as a 26% return on a £150,000 investment. However, this format omits the actual monetary gains or losses. Conversely, monetary returns, like a £39,000 gain on a £150,000 investment, offer direct view of financial impact, but may lack relative change context.
- Risk Choices with Percentages and Real Money: Percentages may lead to riskier choices, while monetary terms may result in conservative decisions. For example, with a £150,000 investment, individuals might prefer a portfolio with a potential 26% return and -12% loss over the same portfolio presented as £39,000 return and -£18,000 loss, simply because 18,000 is a more prominent figure than 12.
3. Risk Rank
Risk portfolio ranks are presented either from low to high risk or from high to low risk.

Issues:
- Heuristic Choices: Our tendency to perceive risk levels as increasing from top to bottom or left to right can lead to misunderstanding when risk levels are reversed. Also, relying on heuristics favouring the middle option can result in altered risk choices. For example, when presented with a set of five portfolios ranging from low to high risk, individuals may prefer the second (Portfolio B) or middle (Portfolio C) options from the top. If the presentation is inverted, individuals may also opt for the second (Portfolio D) or middle (Portfolio C) options from the top. Consequently, they may choose a low-medium or medium risk portfolio in one case, while selecting a medium or medium-high risk portfolio in the other.
4. Performance Order
Performance is presented in columns from low to high returns, from high to low or without clear order.

Issues:
- Loss Aversion: When portfolio options are presented with losses first, investors’ attention may be drawn to potential negative returns, heightening loss aversion and lowering their risk tolerance, which can lead them to favour less risky investments. In contrast, when the highest returns are presented in the first column, it can create a perception of strong initial gains, encouraging a more risk-tolerant approach and favouring higher- return portfolios without fully considering the associated risks. Finally, when portfolios are presented with no specific order (e.g., average, worst, best), investors may struggle to accurately compare performance.
5. Tables v Graphs
Portfolio selection can be based on tables or charts.

Issues:
- Perceived Continuity and Risk: When risk is presented in graphs, lines convey a sense of continuity over time, making upward and downward variations appear more interconnected. This continuous representation encourages investors to perceive performance as a seamless progression, heightening the perceived correlation between data points. In contrast, tables present data in discrete cells, which can isolate each data point, reducing the impression of a continuous trajectory. This difference in perceived continuity leads investors to assess risk as lower when viewing graphs compared to tables, even when both formats contain identical information.
Designing Effective Suitability Assessments
The design of portfolio presentation is paramount in ensuring accurate investment suitability assessments. Behavioural insights reveal that the format and display of information can significantly influence investor perceptions, shaping their understanding of risk and potential returns. By integrating these insights into the design of suitability assessments, firms can create a more transparent and consistent framework that better aligns with investors’ true preferences and risk appetites. A thoughtfully structured presentation not only mitigates cognitive biases but also fosters informed decision-making, ultimately leading to more appropriate portfolio selections.