The adviser can then construct a portfolio that reflects your risk tolerance. For instance, people who are labeled as having a high tolerance for risk may really be reflecting dangerous overconfidence. There is indeed a relation between confidence and risk tolerance: High confidence generally corresponds to high risk tolerance. Overconfident investors perceive risk as lower than less-confident investors, biasing upward the measure of their risk tolerance. Even if overconfidence is unrelated to risk tolerance, it still matters to financial advisers as they guide investors toward fitting portfolios.

Source: Wall Street Journal September 11, 2017 02:16 UTC