What Is Risk-Seeking?
Risk-seeking is one's acceptance of greater risk, in finance often related to price volatility and uncertainty in investments or trading, in exchange for the potential for higher returns. Risk seekers are more interested in capital gains from speculative assets than capital preservation from lower-risk assets.
Risk-seeking can be contrasted with risk-averse.
Key Takeaways
- Risk-seeking refers to an individual who is willing to accept greater economic uncertainty in exchange for the potential of higher returns.
- Risk-seeking confers a high degree of risk tolerance, or the amount of potential losses an investor is willing to accept.
- In contrast with risk-seeking investors, risk-averse investors seek low-risk investments and are willing to accept a lower rate of return because of the desire to preserve capital.
- Examples of asset types that might attract a risk-seeking investor include options, futures, currencies, penny stocks, alternative investments, cryptocurrencies, and emerging market equities.
Understanding Risk-Seeking
Risk-seeking individuals leverage the trade-off between risk and return by accepting more risk in hopes of above-average returns. In general, higher-risk investments demand higher expected return potential, although the quality of the asset in question must be considered beforehand to ascertain whether there is sufficient return potential to justify the risk involved.
Some examples of types of assets that risk-seeking investors would be attracted to would be small-cap equities, derivatives, emerging market equities and debt, currencies of developing countries, junk bonds, and commodities, to name just a few.
Risk-seeking might also describe entrepreneurs who are willing to give up the stability of salaried employment at an established company to start their own companies in the hope of a greater financial and emotional payoff.
Special Considerations
Risk-seeking behavior tends to rise in bull markets, when investors, encouraged by gains in the financial markets, are coaxed into thinking that the good times will continue. There is always a subset of risk seekers who orient their strategies around high-risk/high-return investments. Others, however, may shed their discipline to chase momentum stocks, for example, or try their luck with a hot initial public offering (IPO) that they know little about.
Risk-seeking is an equal opportunity activity sought out by retail investors and professional fund managers alike, but it can go too far. Examples of when risk-seeking behavior caused many investors and speculators to lose huge sums of money include the dotcom bubble of the early 2000s and the housing bubble of the mid-2000s.
$17 trillion
The amount lost in U.S. household net wealth from 2007 to the first quarter of 2009 after the collapse of the housing bubble and onset of the global financial crisis.
Risk-Seeking vs. Risk-Averse
Risk tolerance is an important concept for investors and refers to the degree to which an investor is willing to accept risk for the potential of a higher return. Risk-averse investors opt for low-risk investments and are willing to accept a lower rate of return because of the desire to preserve capital.
Financial advisors endowed with common sense counsel their clients to minimize risk-seeking behavior with respect to their investments. In many cases, particularly for younger individuals, risk-seeking is part of an overall investment strategy, as risk assets can provide a boost to total portfolio returns.
For individuals who need more certainty of funds for an imminent house down payment, college education, or retirement, lower-volatility investments are recommended. Risk-averse investors would prefer to look to assets such as government securities, blue-chip dividend stocks, investment-grade corporate bonds, and even certificates of deposit (CDs).
High-Risk Portfolios
Risk-seeking investors will often construct a portfolio of high-risk investments that they believe have the potential to reap high gains. There are various strategies investors can employ to construct a high-risk portfolio.
One strategy is to create a concentrated portfolio focused only on investing in a single sector or industry, such as technology. This type of portfolio can work best for an investor who already possesses knowledge of the sector and understands it well.
Another strategy for a high-risk portfolio is momentum investing. This method relies upon working with volatility and seeking investments that are already trending up. The momentum investor is not looking for a long-term investment but instead wants to capture short-term gains and sell the investment as soon as momentum wanes. Several timing risks exist with this strategy, such as getting into a position too early or closing out too late to achieve the best gains.
Other strategies for building a high-risk portfolio include investing in currencies, options, or futures. Each of these asset types uses the power of leverage, which enables investors to multiply their buying power in the market. To be successful in these strategies requires investors to be well-educated in trade execution and research. Investors need to monitor these investments closely, be able to stomach fast-paced trading scenarios, and be able to develop an exit strategy to preserve capital and gains.
FAQs
Risk-seeking is one's acceptance of greater risk, in finance often related to price volatility and uncertainty in investments or trading, in exchange for the potential for higher returns. Risk seekers are more interested in capital gains from speculative assets than capital preservation from lower-risk assets.
What is the meaning of risk-seeking behavior? ›
Why does she do these things if it puts herself and others in danger? The answer is that she is engaging in risk-seeking behavior, which is defined as engaging in activities that put oneself at risk, either consciously or unconsciously. As much money and life as you could want!
What is an example of a risk seeker? ›
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.
What is the difference between risk-seeking and risk-averse? ›
Risk-averse individuals tend to avoid taking risks and would instead settle for a less rewarding but certain decision and forego a riskier but more rewarding choice. On the other hand, risk-seeking individuals tend to work with higher uncertainties and have made peace with potential losses.
What is risk-seeking in project management? ›
Risk Averse: An individual or organization that is not comfortable with risk. Risk Neutral: An individual or organization that is neutral to risk and attempts to deal with it objectively. Risk Seeking: An individual or organization actively drawn to taking risks, viewing them as opportunities for growth and success.
What are the characteristics of risk-seeking people? ›
Risk-seeking refers to an individual who is willing to accept greater economic uncertainty in exchange for the potential of higher returns. Risk-seeking confers a high degree of risk tolerance, or the amount of potential losses an investor is willing to accept.
What are 3 examples of risk behaviors? ›
The most common high-risk behaviors include violence, alcoholism, tobacco use disorder, risky sexual behaviors, and eating disorders.
Why are people risk-seeking? ›
Social Influences
Risky behaviors can sometimes be a way to gain social approval or acceptance. Peer pressure, for example, can play a significant role in risk-taking behaviors. 3 If someone sees their friends or peers doing risky things and wants to feel accepted by them, they might engage in those behaviors too.
What is the difference between risk taker and risk seeker? ›
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.
What causes risk-taking behaviour? ›
Risk-taking behaviors occur because we make a decision to engage in the behavior (Furby & Beyth-Marom, 1992; Reyna & Farley, 2006). Emotions, impulsivity, a failure to plan ahead—these and other reasons—can lead to greater involvement in risk-taking behaviors.
Risk-averse people will have tendencies in their life choices, financial or otherwise, to make predictable decisions with predictable outcomes. These predictable choices generally produce average or lower returns than someone who may choose a riskier venture.
What is the difference between risk-seeking and loss aversion? ›
Risk aversion is the general bias toward safety and the potential for loss. Loss aversion is a pattern of behavior where investors are both risk averse and risk seeking.
Is it better to be a risk taker or risk-averse? ›
The risk takers take too many risks without any planning and, like a chronic gambler, too often walk away a loser. The risk averse are continually stuck in the development of the plan, but the plans are just plans. Since the plans will never be good enough, they never get implemented.
What is a risk loving or risk-seeking consumer? ›
A risk-loving person prefers an uncertain outcome to a certain outcome, even if the expected utility of the uncertain outcome is less than that of the certain outcome. A risk-loving person exhibits increasing marginal utility.
What is an example of risk aversion? ›
For example, a risk-averse investor might choose to put their money into a bank account with a low but guaranteed interest rate, rather than into a stock that may have high expected returns, but also involves a chance of losing value.
What are the three categories of risk preference? ›
Risk preferences can be broadly categorized into three types: risk-averse, risk-neutral, and risk-seeking.
What is the definition of risk taking behavior? ›
Risk-taking is defined as a behavior that may result in a positive outcome (e.g., financial reward, pleasant physical or psychological sensations) and also carries some probabilities of a negative outcome (e.g., injury, financial loss) ( Lejuez et al., 2002; MacPherson et al., 2010).
What does risk behavior mean? ›
Risky behaviors are those that potentially expose people to harm, or significant risk of harm, which prevent them from reaching their potential in life and which can cause significant morbidity or mortality.
What is risk preference behavior? ›
Risk preference refers to the attitude people hold towards risks, which is a key factor in studies on investors' decision-making behavior. Standard financial theory assumes that investors are rational and believes that when making investment decisions they tend to have invariant risk preferences-risk averse.
What is the definition of risk Behaviour and why is it important? ›
Risk behavior is the behavior of individual that may result in negative consequences, risks to life, death, injury, violation etc. It is important for teenagers as during this age of life teens may not have a correct perspective of what is correct for them and what is not.
