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Risk-Averse Behavior

Risk-averse behavior is the propensity for investors to seek certain positive outcomes over uncertain outcomes with higher expected returns.

Risk-averse behavior is the propensity for investors to seek certain positive outcomes over uncertain outcomes with higher expected returns. For example, risk-averse investors seek sure gains over “gambles” that may offer higher profit potential.

Risk-averse behavior is also referred to as loss aversion. Investors tend to be more focused on avoiding risk when considering investment gains but more focused on seeking risk when faced with investment losses.

The framing of an investment’s gain or loss potential is influential when making investment decisions. The psychological cost of a $1 loss is greater than the psychological gain of earning more than $1 because the emotion attached to the fear of loss is presumably stronger.

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