Risk Seeking Meaning Example Graph Vs Risk Aversion

Risk-Seeking Meaning

Risk-seeking is a high-risk, high-reward approach to investing. In financial markets, risk-takers take eccentric positions despite visible risks. The risk here refers to price fluctuations and investment positions.

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Investors with high risk-appetites are more likely to take a direction contrary to their fellow investors. But not just financial, risk-taking affects all aspects of life. For example, the stock market attracts risk takers; here, investors taking high risks can also end up with high rewards.

Risk-Seeking Explained

Risk-seeking is the ability to bet or take a higher risk position. It can be attributed to personality, as well as mindset. Some individuals have a higher risk appetite; they are inclined toward risk-oriented predicaments because they seek higher returns. In finance, a high-risk appetite is mostly associated with investors and intraday traders.

Key Takeaways

Risk-seeking is the pursuit of high gains, even at the cost of high risks. Risk-takers in financial markets prefer risky stock positions, eccentric investing, options trading, futures, cryptocurrencies, startups, and penny stocks. A risk-averse investor is a polar opposite. They invest in low-return, low-risk financial instruments. The prospect theory claims that most people in society are risk-averse.Market experts and trade analysts do not recommend risk-seeking. Markets are very uncertain; price volatility can cause substantial losses.

In the stock market, risk-seeking investors are a subset who bet oddly. Stereotypically, these investors conduct minimal research before investing. They might even ignore fundamental metrics associated with the underlying firm. Nonetheless, risk takers know to identify good stocks and interpret future price variations.

With such high-risk investments, there is a lot of uncertainty. It is important to note that not all high-risk investors have a high-risk appetite. Because not all investors are aware of the risk associated with their investments, ideally, investors must first confirm their risk appetite before taking massive risks. If not, it might all end up in huge losses.

Risk-taking is not limited to finance. There is a certain stereotype against high-risk appetite—risk takers are considered greedy, someone who expects unrealistic returns in a short period. In contrast, a huge section of society is risk-averse. They take as few risks as possible. Nonetheless, everyone wants a high return portfolio. But again, only a few are willing to take huge risks to achieve that.

For natural risk takers, the reward is so important that they are willing to suffer losses. But this approach is not recommended by market experts and trade analysts. Because markets are very uncertain, price volatility is a serious concern for investors. Most economic theories reject this high-risk approach.

Example

Raven and Rosamund are office colleagues. They have the same job title and draw the same remuneration. Each possesses a small portfolio—they readily invest in stocks and other forms of assets.

There is a difference, though; Raven has a riskier approach toward investment. Raven buys penny stocks and takes various positions in options trading and futures contracts. Raven undertakes minimal research; she is more inclined towards high-risk maneuvers. As a result, Raven books higher returns than Rosamund. But, in the long run, the risk will likely catch up with her. She could lose a large sum of money at once. Raven is a typical example of a risk-seeking individual.

Rosamund is the opposite of Raven; she is a risk-averse investor. Rosamund, on the other hand, has a stable portfolio. She only invests in blue chip stocks. In addition, she invests only when she fully understands a particular financial instrument. Rosamund follows SIP and believes in long-term wealth creation.

Graph

Risk-taking abilities vary from one investor to another. Individuals are categorized into three types based on risk: risk-averse, risk-neutral, and risk-seeking. The graph shows the risk-seeking and risk aversion curves form a lens shape. This is intersected by a straight-line utility function depicting risk-neutral behavior.

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The graph depicts both the risk-seeking approach and the risk-averse approach toward investment. The behavior of a risk-averse individual is depicted by a concave outline, whereas the behavior of a risk-taker is depicted as a convex outline.

Risk Aversion vs Risk-Seeking

Risk aversion signifies a reluctance to take risks. An investor is called risk-averse when they prefer low-return investments with known risks (over high-return investments with a level of uncertainty).Risk aversion is the tendency to play it safe. Not just financially, this approach affects social life, personal decisions, career, and purchases as well. In contrast, individuals with a higher risk appetite take more risks.Risk-aversion is more common in society; risk takers are fewer in number.Risk-averse investors maintain a balanced portfolio; they are satisfied with average returns. On the other hand, risk takers are driven by the prospect of earning maximum returns and high profits.There is an overlap between risk aversion and a long-term approach toward investment. In contrast, most risk takers try to generate maximum returns through short-term trading. They seek quick returns. Be it major life decisions or investments, risk-averse individuals do not invest unless they feel safe. As a result, they prefer blue chip stocks, mutual funds, fixed deposits, etc. In contrast, risk takers prefer options trading, futures contract, penny stocks, etc.