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It is embarrassing and sad to occupy the slot that belonged to Peter Bernstein - but I suppose he would not have wished it to be vacant. Here it goes.
It is common ground in the industry that investors vary on a dimension of risk tolerance, and that the task of a financial advisor is to find a portfolio that fits a number: the investor's "attitude to risk." My purpose, here, is to suggest that there is no such thing.
The idea of risk preference originated in classic utility theory, where risk aversion is measured by the curvature of the utility function for wealth. Standard finance theory and the practices that build on it have adopted this unidimensional conception of risk. Psychology and behavioral economics suggest a more complex view - and I will argue that even those approaches neglect crucial...