“people are risk-averse when there is a moderate to high probability of gains or a low probability of losses; they are risk-seeking when there is a low probability of gains or a high probability of losses. This is consistent with people simultaneously buying lottery tickets and insurance while investing money conservatively.”
Why is that?
What do you prefer?
100% chance of getting $ 500
or
50% chance of getting 0 and 50% chance of getting 1,000?
Empirical studies have shown that most people prefer option 1 (a secure $ 500 income). This reveals that most of investors are risk averse and loss averse.
On the other hand, what do you prefer?
100% chance of losing $ 400
or
50% chance of losing nothing and 50% chance of losing $ 800
Empirical studies have shown that most people prefer option 2 in this case, which means that they prefer to take the opportunity to get rid from a lose. Remember that people are loss averse. This reveals that most of investors are risk-takers when they are facing loses (when they are at the negative side of their utility function).
This discovery explains a lot about the motivations or drivers that carry investors to take products that hedge or pay them from low probability but significant outcomes like insurances (the loss side) and lottery tickets (the win side).
Hope this helps
You mean people are risk-averse when they are choosing between a moderate to high probability of gains and a low probability of losses; they are risk-seeking when they are choosing between a low probability of gains and a high probability of losses? So, risk-averse people will choose to have a low probability of losses (eg, insurance), while risk-seeking people will choose a low probability of gains (eg, lottery)?