An Interview with Chuck Grace
What is the official title of your article?
"Measuring the gap between elicited and revealed risk for investors: An empirical study"
Who are your collaborators and where are they located?
- John Thompson, UBC Okanagan
- Leon Feng, Western University
- Mark Reesor, Laurier University
- Adam Metzler, Laurier University
When and where was this study conducted?
The study was completed in 2021 and published in 2022
Was this research funded by a larger program of research or a large grant?
The research is part of a larger collaboration between Western, Laurier, UBC and 4 industry partners. Collaborators at the University of Winnipeg, York University and the Indian School of Business are also involved. Altogether, including grants from NSERC and the Fields Institute, we have obtained funding of a little over $2m over 3 years.
Is this part of an ongoing collaboration?
The research is part of a larger initiative called the Financial Wellness Lab of Canada. At the Lab we are using granular, real-world data sourced historically and, moving forward, in real time and then, with the assistance of machine learning, to look for subtle relationships and trends that have not been previously studied. In total, there are over 25 researchers, post-docs, grad students and undergrads associated with the Lab. You can check us out at https://uwo.ca/sci/financialwellnesslab/index.html
For someone like me with no research experience, how would you describe the overarching concepts behind this article in the simplest terms possible? Tell me about your research in laymen’s terms.
In this particular paper we explored how financial advisors determine a client’s investment risk profile and use the profile to recommend a portfolio of investments. We then explored whether investors continue to invest and trade on a basis consistent with their risk profile. Through the research we were able to create a metric that can be used by advisors and clients to ensure they are ‘staying on track.’
What was the motivation to speak specifically to this matter?
This paper is one piece of jigsaw exploring financial resiliency. The goal is to develop quantitative finance and data analytics solutions that will enable Canadian households to enhance their financial resilience. The events of the last 3 or 4 years and the economic impact of COVID-19 gave increased urgency to the topic of financial resilience. The number of Canadians falling into the financially ‘stressed’ category has risen alarmingly in recent years. There is clear value in helping financially stressed individuals understand the root of their financial challenges and then providing them with advice (tailored to their specific circumstances) on the steps they may be able to take to change their circumstances and alleviate their financial stress.
What is the most shocking or groundbreaking finding from your research?
In this paper we found that Canadian financial advisors and investors are surprisingly safe and conservative in how they invest. i.e., that they are consistently safer with their investments than their risk profile would suggest. Some might refer to it as being ‘typically Canadian’. But the results are a double-edged sword. Safer investing patterns implies more resiliency over the long run. But it also implies lower returns on your investments. We are now exploring whether Canadians compensate by saving more in order to stay on track with their financial goals. And whether the ‘safer’ pattern is consistent across demographics – men versus women for example.
What would you say is the biggest takeaway from your research and its impact on the world/community?
It’s ‘okay’ to be risk averse. Sometimes, when investing for example, it’s just a smart thing to do.
Do you have future plans for this research? If so, what are they?
We are just getting started. We are 6 months into our funding and already working on 3 new manuscripts and a number of new partnerships. In addition to looking at how Canadians save & invest, we are looking at spending patterns, household debt and how disposable income affects resiliency (for example). It’s going to be an exciting couple of years.
If you had to sum up this article for the public in 140 characters, what would you say?
It’s ‘okay’ to be risk averse. Sometimes, when investing for example, it’s just a smart thing to do.. But not when you are trying to win the World Cup.
Read more about Chuck's article here.