Risk capacity is the amount of loss a financial plan can absorb before the plan stops working. It is arithmetic rather than psychology, and it is independent of how the investor feels about risk.
Capacity comes out of the plan, not the client. Time horizon, required withdrawals, other income, fixed obligations, and how much flexibility exists in the goal all feed it.
Two people with identical answers on a tolerance questionnaire can have completely different capacity, and usually do.
The same percentage loss means something different at thirty years from the goal than at three. Recovery requires time, and time is the input the investor cannot manufacture later.
This is also why sequence-of-returns risk is a capacity problem rather than a tolerance problem.
A goal that can move is a goal with more capacity behind it. Retiring within a two-year window rather than on a fixed date is, in risk terms, a real asset.
They disagree often, in both directions, and the disagreement is the useful signal. A client with high tolerance and low capacity is the one to worry about most, because nothing in the conversation will feel wrong until it is.
Reconciling the two is advice, and it is the adviser's job. No score does it for you.
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Behavioural risk →