Limitations of the investor information confirmation form in capturing investor risk propensity

Abstract

The financial consumer protection laws in South Korea emphasize the principle of suitability to ensure the well-being of the financial consumer. To adhere to these regulations, financial institutions utilize the behavioral risk assessment (BRA) form to assess investors’ characteristics. This study evaluates the effectiveness of these forms in capturing investor risk propensities, using Economic Risk Attitude (ERA), Instrumental Risk-Taking (IRT), and Stimulating Risk-Taking (SRT) as comparative benchmarks. Unlike previous research focused mainly on financial risk attitudes, this study introduces a multidimensional approach that includes psychological factors like SRT, offering a more comprehensive understanding of investor behavior. Findings reveal that while BRA assessments correlate with ERA and IRT, they fail to capture the excitement-driven aspects of risk propensity represented by SRT, indicating that BRA forms may inadequately reflect investors' risk profiles. This underscores the need for refining BRA forms by integrating psychological risk factors, advocating for a multidimensional framework that enhances consumer protection and enables more tailored investment strategies. The study contributes actionable insights for financial consumer protection and sets the stage for integrating advanced technologies, such as AI, to further refine risk assessments.