Assessing the Risk Profile of a Retail Investor with a Focus on Complementing Retirement Investments – a Fuzzy Logic Approach

Abstract

In order to provide the best services to their customers for undertaking investments for retirement as part of the third pillar of the retirement reform from the World Bank, financial institutions assess private investors' risk profiles. There are many approaches to assessing a risk profile. Since risk profile definitions are vague and assessment deals with many imprecisions, uncertainty, and missing information, we proposed an approach based on fuzzy logic, which proved capable of dealing with those phenomena. We described a framework where we can translate risk profile components into fuzzy sets and assess risk profiles using fuzzy inference. We argued for flexibility, understandability (to a non-technical audience), and transparency. We proposed that future work focuses on parts of our proposed framework, as we have given those very broadly to provide proof of concept