Risk Aversion Essay

Exclusively available on Available only on IvyPanda® Made by Human No AI

Definition of Risk Aversion

Risk aversion, also referred to as risk avoiding, is the likeliness of an investor to take the investment with a lower risk rather than the investment with a higher risk, given that the expected return for the two investments is the same. A risk-averse person is often not willing to take risk. This person would rather stick to low but guaranteed return investments rather than go for high return investments which are not guaranteed (Baker, 2011).

Why Rational Investors are Risk Averse

Normally, most investors are risk-averse. This is because; people prefer certainty to uncertainty when it comes to money matters. Rational investors prefer to remain risk-averse so as to minimize their exposure to the worst possible outcome.

Risk-averse employees would rather work in an organization where they have job security than engage in self-employment venture which has a higher rate of income. This is because, even though self-employment has the potential of bringing in a lot of money, it has the risk of losing the entire venture in time.

If a risk-averse investor is faced with the option of either investing in equities or a bank account, the investor will prefer to invest in a bank account. Even though, the equities have the possibility of a greater rate of return, most rational investors would go for the lower but guaranteed rate of return (Kolakowski, 2012).

Am I or My Firm Risk Averse? Why?

Most risk-averse investors make their investment decision by putting a lot of weight on the worst possible scenarios. However, the worst possible scenario has a low probability of ever occurring. Depending on the location where I grew up and the economic climate prevailing, I tend not to be risk-averse.

It is necessary for one to know that not being risk-averse is like gambling. In gambling, one can never be sure of winning. One has to consider how much one has to lose in the worst scenario and how many times the ‘gambling game’ will be repeated. If there is an opportunity of repeating the ‘gambling game’ a number of times, then the worst and best scenarios tend to balance.

The need for one to be risk-averse comes in when the ‘gambling game’ is only repeated a couple of times, or its not repeated at all. One should also be risk-averse if the venture is too high such that one may not afford to lose. Therefore, depending on the venture, I would choose whether to be or not to be risk-averse (Risk Averse, 2012).

Does Risk Averse Vary by Geographical Location?

Experience of an individual play a huge role in the person’s level of risk aversion. Individuals who grew up in very harsh economic environments tend to be more risk-averse than individuals from well developed economic climates. It is evident that people from countries which have been undergoing challenging economic times tend to be more risk-averse (Risk Aversion, 2012).

People who were young in the 1930s during the Great Depression tend to manage money in a very conservative way. This group of people shies away from the notion of increasing their investment if the return is not guaranteed. This is because these people have memories of the Great Depression; they fear that it might happen again. Therefore, both the time as well as the physical location of an individual plays a significant role in an individual’s risk averseness.

References

Baker, S. (2011). Risk Aversion. Web.

Kolakowski, M. (2012). Risk Aversion: Financial Careers Guide. Web.

Risk Averse. (2012). Web.

Risk Aversion. (2012). Web.

More related papers Related Essay Examples
Cite This paper
You're welcome to use this sample in your assignment. Be sure to cite it correctly

Reference

IvyPanda. (2019, May 13). Risk Aversion. https://ivypanda.com/essays/risk-aversion-essay/

Work Cited

"Risk Aversion." IvyPanda, 13 May 2019, ivypanda.com/essays/risk-aversion-essay/.

References

IvyPanda. (2019) 'Risk Aversion'. 13 May.

References

IvyPanda. 2019. "Risk Aversion." May 13, 2019. https://ivypanda.com/essays/risk-aversion-essay/.

1. IvyPanda. "Risk Aversion." May 13, 2019. https://ivypanda.com/essays/risk-aversion-essay/.


Bibliography


IvyPanda. "Risk Aversion." May 13, 2019. https://ivypanda.com/essays/risk-aversion-essay/.

If, for any reason, you believe that this content should not be published on our website, please request its removal.
Updated:
This academic paper example has been carefully picked, checked and refined by our editorial team.
No AI was involved: only quilified experts contributed.
You are free to use it for the following purposes:
  • To find inspiration for your paper and overcome writer’s block
  • As a source of information (ensure proper referencing)
  • As a template for you assignment
Privacy Settings

IvyPanda uses cookies and similar technologies to enhance your experience, enabling functionalities such as:

  • Basic site functions
  • Ensuring secure, safe transactions
  • Secure account login
  • Remembering account, browser, and regional preferences
  • Remembering privacy and security settings
  • Analyzing site traffic and usage
  • Personalized search, content, and recommendations
  • Displaying relevant, targeted ads on and off IvyPanda

Please refer to IvyPanda's Cookies Policy and Privacy Policy for detailed information.

Required Cookies & Technologies
Always active

Certain technologies we use are essential for critical functions such as security and site integrity, account authentication, security and privacy preferences, internal site usage and maintenance data, and ensuring the site operates correctly for browsing and transactions.

Site Customization

Cookies and similar technologies are used to enhance your experience by:

  • Remembering general and regional preferences
  • Personalizing content, search, recommendations, and offers

Some functions, such as personalized recommendations, account preferences, or localization, may not work correctly without these technologies. For more details, please refer to IvyPanda's Cookies Policy.

Personalized Advertising

To enable personalized advertising (such as interest-based ads), we may share your data with our marketing and advertising partners using cookies and other technologies. These partners may have their own information collected about you. Turning off the personalized advertising setting won't stop you from seeing IvyPanda ads, but it may make the ads you see less relevant or more repetitive.

Personalized advertising may be considered a "sale" or "sharing" of the information under California and other state privacy laws, and you may have the right to opt out. Turning off personalized advertising allows you to exercise your right to opt out. Learn more in IvyPanda's Cookies Policy and Privacy Policy.

1 / 1