What is real risk tolerance?
Every family office has a stated risk tolerance. It sits in the Investment Policy Statement, shaped by careful conversations about time horizons, liquidity needs, intergenerational objectives. It reflects the family’s values, their relationship with the wealth, their ambitions for what it should do across generations. It looks considered because it is considered.
And then the portfolio drops like a stone in a matter of weeks.
What happens in that investment committee meeting - or more often, in the conversation between the CIO and the family principal - reveals something the IPS never could: the actual risk tolerance. Not the considered, documented version agreed upon in calmer times. The real one, shaped by the particular anxiety of watching capital erode in real time, by the founder who built the wealth and cannot psychologically treat it as just numbers on a page, by the next generation inheritors whose relationship with risk was formed watching someone else take it, by the difference between understanding volatility intellectually and experiencing it viscerally across a family’s entire net worth.
In fifteen years travelling in emerging markets with family offices, endowments and institutional investors, these two never always matched perfectly. The gap between them isn’t a failure of process. Most sophisticated family offices have excellent processes. It isn’t a failure of intelligence. The principals and CIOs navigating these conversations are typically among the sharpest in any room. Maybe it’s more about self knowledge.
Behavioural finance gives us the vocabulary: loss aversion, recency bias, the asymmetric pain of losses relative to equivalent gains. We can map these patterns onto market history and build frameworks to account for them. What we do less well is apply that same analytical rigour inward - to examine our own patterns with the discipline we’d bring to evaluating an external manager.
The family offices that navigate volatility most effectively aren’t necessarily the ones with the most sophisticated risk models. They’re the ones who’ve done the harder work of understanding their own psychology: the founder’s emotional relationship with capital they spent decades building, the governance structures that allow honest conversations when markets move against the thesis, the difference between the family’s stated philosophy and what the evidence of their actual decisions reveals.
That gap between what we say we’ll do and what we do is where the most consequential allocation decisions get made. Understanding it isn’t a soft consideration alongside the quantitative framework. It is the framework.
Rebecca Lewis is Partner & Co-CEO at Arisaig Partners. The views expressed are personal.