Test your risk intelligence – and become a smarter investor

Author: Chris Rees, TenStocks

Covestor model: TenStocks

Projection Point, a purveyor of ‘risk intelligence solutions’, say risk intelligence is the ability to estimate probabilities accurately and that people with high risk intelligence tend to make better predictions than those with a low RQ. Ever the curious soul, especially when it comes to the study and practice of risk management, I took PP’s free RQ test. I figured free would reduce the risk of not getting value out of it.

I responded to fifty statements based on how sure I was they were true or false. If I was certain a fact was true I could give it 100%. If I knew it was false I could give 0%. Any indecision about the veracity of a statement I could assign anywhere from 10%-90% depending on the degree of confidence I had of knowing the answer.

The statements were thought provoking.

Zinedine Yazid Zidane played on the French national team for over 5 years.
I knew the answer to this one, but if I didn’t there were lots of ways to be wrong. This isn’t a typical French name. It does not specify a sport. Maybe he played for 4.9 years? In investing, risk is not in what you know, it’s in what you don’t know.

The United States Declaration of Independence starts with ‘We the people’.
It doesn’t. It starts with ‘When in the course of human events’. Many making a snap decision could well get this one wrong. Slow down. Take your time. Think twice. Investing success never comes with haste.

How about this one?

Mount Vesuvius is a valcano. (They spelled it wrong)
I gave this a zero chance of being right. Projection Point told me I was 100% wrong. As in investing, you will sometimes be wrong even when you are right – and sometimes you will just be wrong. That’s why position sizing and diversification in a portfolio is important. Balance risk. Control it. Pay attention to small details.

What I did in this test was simple. Anything I wasn’t sure about I gave 50%. When I was absolutely certain I knew the statement was true or false I gave 100% or 0%.

In investing, this is what Mr. Warren Buffett calls waiting for the fat pitch. You don’t need to strike at every ball, nor should you. Wait until you are sure.

I scored 85 out of a 100 on risk intelligence. According to Projection Point, this places me in the top 4.6% of the roughly 60,000 people who have taken the test. The average test taker score is 62.

I was feeling pretty good, but it didn’t last. On the results page, PP dropped the hammer on me with the following paragraph:

By now you may have realized there is an easy way to game this test. If you always select the 50% category unless you are pretty certain that a statement is true or false – and if the test contains equal numbers of true and false statements – you will score highly, perhaps near 100.

Unless, of course, you don’t know what a valcano is.