People are risk-averse when there is a moderate to high probability of gains or a low probability of losses.
People are risk-seeking when there is a low probability of gains or a high probability of losses.
Could anyone help me explain those above? Many thanks.
So as an investor when you know a certain asset offers you low chance of loss and you still invest, that would make you a risk averse investor.
When an asset offers you a higher chance of loss and when you still invest, that makes you risk seeking as you can afford to take the risk or you’re super sure the high risk asset will earn you good returns.
The relation between return and risk is positive. This means that the higher the risk taken in an investment, the higher the expected return.
Risk-seeking investors are driven by return seeking, therefore they are risk seekers. In other words, they are prone to increase their exposure to risk in order to get high returns, at expense of choosing a high probability of loses (an acceptable definition of risk btw). A real example would be investors that invest in concentrated positions like options on stocks, single stock positions, exotic businesses, etc.
Risk-averse investors are driven by secure returns, at expense of small returns of course. So they choose investments with high probability of gains and small probabilities of loses.