In
accounting
Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "languag ...
,
finance
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fina ...
, and
economics
Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services.
Economics focuses on the behaviour and intera ...
, a risk-seeker or risk-lover is a person who has a
preference
In psychology, economics and philosophy, preference is a technical term usually used in relation to choosing between alternatives. For example, someone prefers A over B if they would rather choose A than B. Preferences are central to decision theo ...
''for''
risk
In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environme ...
.
While most
investors
An investor is a person who allocates financial capital with the expectation of a future return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some species of property. Type ...
are considered
risk ''averse'', one could view casino-goers as risk-seeking. A common example to explain risk-seeking behaviour is; If offered two choices; either $50 as a sure thing, or a 50% chance each of either $100 or nothing, a risk-seeking person would prefer the gamble. Even though the gamble and the "sure thing" have the same
expected value
In probability theory, the expected value (also called expectation, expectancy, mathematical expectation, mean, average, or first moment) is a generalization of the weighted average. Informally, the expected value is the arithmetic mean of a l ...
, the preference for risk makes the gamble's
expected utility The expected utility hypothesis is a popular concept in economics that serves as a reference guide for decisions when the payoff is uncertain. The theory recommends which option rational individuals should choose in a complex situation, based on the ...
for the individual much higher.
The Utility Function and Risk-Seekers
Choice under uncertainty is when a person facing a choice is not certain of the possible outcomes or their probability of occurring.
The standard way to model how people choose under uncertain condition, is by using
expected utility The expected utility hypothesis is a popular concept in economics that serves as a reference guide for decisions when the payoff is uncertain. The theory recommends which option rational individuals should choose in a complex situation, based on the ...
. In order to calculate expected utility, a
utility function
As a topic of economics, utility is used to model worth or value. Its usage has evolved significantly over time. The term was introduced initially as a measure of pleasure or happiness as part of the theory of utilitarianism by moral philosopher ...
'u' is developed in order to translate money into
Utility
As a topic of economics, utility is used to model worth or value. Its usage has evolved significantly over time. The term was introduced initially as a measure of pleasure or happiness as part of the theory of utilitarianism by moral philosopher ...
.
Therefore, if a person has '
' money, their utility would be
. This is explored further when investigating potential "prospects". A prospect, in this context, is a list of expected payoffs and their probabilities of occurring.
A prospect is summarised using the form;
The overall expected value of the prospect (A) is subsequently expressed as;
The expected utility, U(A), of the prospect is then determined using the below formula;
The utility function is
convex
Convex or convexity may refer to:
Science and technology
* Convex lens, in optics
Mathematics
* Convex set, containing the whole line segment that joins points
** Convex polygon, a polygon which encloses a convex set of points
** Convex polytope ...
for a risk-lover and
concave
Concave or concavity may refer to:
Science and technology
* Concave lens
* Concave mirror
Mathematics
* Concave function, the negative of a convex function
* Concave polygon, a polygon which is not convex
* Concave set
* The concavity
In ca ...
for a risk-averse person (and subsequently linear for a
risk-neutral
In economics and finance, risk neutral preferences are preferences that are neither risk averse nor risk seeking. A risk neutral party's decisions are not affected by the degree of uncertainty in a set of outcomes, so a risk neutral party is indif ...
person).
Subsequently, it can be understood that the utility function curves in this way depending on the individual's personal preference towards risk.
Below is an example of a convex utility function, with wealth, '
' along the x-axis and utility, '
' along the y-axis. The below graph shows how greater payoffs result in larger utility values at an increasing rate. Showing that the person with this utility function is "risk-loving".
Alternatively, below is an example of a concave utility function, with wealth, '
' along the x-axis and utility, '
' along the y-axis. The below graph again display's an individual's utility function, however this time lower payoffs have a larger utility with respect to the original payoff (or "wealth") value. The utility values, although still increasing, do so as a decreasing rate. Showing that this person is "
risk-averse
In economics and finance, risk aversion is the tendency of people to prefer outcomes with low uncertainty to those outcomes with high uncertainty, even if the average outcome of the latter is equal to or higher in monetary value than the more ce ...
".
It is important to note that for prospect theory value functions, risk-seeking behaviour can be observed in the negative domain
, where the functions are convex for
but concave for
.
Psychology
Child personality traits' effect on adulthood – What traits contribute to risk-seeking?
In a study done by Friedman et al. (1995), they found significant evidence to support that low childhood conscientiousness contributed heavily to adulthood mortality.
[Hampson, S., (2006). Methods by which childhood personality traits influence adult well-being. ''Current Directions in Psychological Science'', 17, 264-268.] Those who were high in conscientiousness as a child were 30% less likely to die in their adulthood. Ultimately, their findings solidified that low levels of childhood conscientiousness predict risk seeking, and risk-seeking increases the chance of accidental death. Though risk-seeking deteriorates with age, risky exposure to abusive substances in adolescence can lead to lifetime risk factors due to addiction.
Conscientious individuals are subject to greater internal impulse control which lets them think out risky decisions more carefully, while those low on conscientiousness are more likely to endanger themselves and others by risky, or sometimes even criminal behaviour.
Psychometric paradigm
The psychometric paradigm explores what stable personality traits and risk behaviours have in common with an individualistic approach.
[Zuckerman, M., Kuhlman, D. M., Joireman, J., Teta, P., 8c Kraft, M. (1993). A comparison of three structural models for personality: The big three, the big five and the alternative five. ''Journal of Personality and Social Psychology'', 65, 757-768.] Zuckerman's (1994) sensation seeking theory is important in assessing the
causative
In linguistics, a causative (abbreviated ) is a valency-increasing operationPayne, Thomas E. (1997). Describing morphosyntax: A guide for field linguists'' Cambridge: Cambridge University Press. p. 173–186. that indicates that a subject either ...
factors of certain risk-seeking behaviours. Many risk-seeking behaviours justify humans need for sensation seeking.
Behaviours like adventurous sports, drug use, promiscuous sex, entrepreneurship, gambling, and dangerous driving to name a few both represent sensation seeking, as well as risk seeking. Impulsivity has been linked to risk-seeking and can be described as the desire to indulge in situations with a potential reward, and little to no planning of the potential punishments of loss or reward.
Impulsivity has also been linked to sensation seeking and in recent theories have been combined to form a higher order trait called impulsive sensation seeking.
Neuropsychological paradigm
The neuropsychological paradigm looks at why people make the decisions they do, as well as the neuropsychological processes that contribute to the decisions people make. This view looks less at impulsivity, puts more emphasis on cognitive dynamics and assumes people take risks because they have assessed the future outcomes.
Men vs. women seeking risks
![Train_Surfing_in_Soweto](https://upload.wikimedia.org/wikipedia/commons/e/eb/Train_Surfing_in_Soweto.jpg)
Demographic differences also play a role in risk-seeking between individuals. Through an analysis done by scientists, they demonstrated that men typically seek risks more than women. There are biological differences in men and women that may lead to the drive to seek risks. For example, testosterone plays a large role in risk-seeking in people and women have significantly lower levels of this hormone. This hormone has behavioural effects on aggression, mood and sexual function, all of which can lead to risk-seeking decision making. In their study, they also found that testosterone in excess leads to increased sexual enjoyment, and therefore more of an incentive to engage in risky unprotected sex.
[Llewellyn, D. (2008) The psychology of risk-taking: toward the integration of psychometric and neuropsychological paradigms. ''The American Journal of psychology,'' 121, 363-376.]
References
{{DEFAULTSORT:Risk-seeking
Financial economics
Prospect theory
Financial risk
Utility
Personality