In economics and finance, a risk-seeker or risk-lover is a person who has a preference for risk. While most investors are considered risk averse, one could view casino-goers as risk-seeking. If offered either $50 or a 50% each chance of either $100 or nothing, a risk-seeking person would prefer the gamble even though the gamble and the sure thing have the same expected value.
Child personality traits’ effect on adulthood – What traits contribute to risk-seeking?
In a study done by Friedman et al. (1995), they found significant evidence to support that low childhood conscientiousness contributed heavily to adulthood mortality. Those who were high in conscientiousness as a child were 30% less likely to die in their adulthood. Ultimately, their findings solidified that low levels of childhood conscientiousness predict risk seeking, and risk-seeking increases the chance of accidental death. Though risk-seeking deteriorates with age, risky exposure to abusive substances in adolescence can lead to lifetime risk factors due to addiction. Conscientious individuals are subject to greater internal impulse control which lets them think out risky decisions more carefully, while those low on conscientiousness are more likely to endanger themselves and others by risky, or sometimes even criminal behaviour.
The psychometric paradigm explores what stable personality traits and risk behaviours have in common with an individualistic approach. Zuckerman’s (1994) sensation seeking theory is important in assessing the causative factors of certain risk-seeking behaviours. Many risk-seeking behaviours justify humans need for sensation seeking. Behaviours like adventurous sports, drug use, promiscuous sex, entrepreneurship, gambling, and dangerous driving to name a few both represent sensation seeking, as well as risk seeking. Impulsivity has been linked to risk-seeking and can be described as the desire to indulge in situations with a potential reward, and little to no planning of the potential punishments of loss or reward. Impulsivity has also been linked to sensation seeking and in recent theories have been combined to form a higher order trait called impulsive sensation seeking.
The neuropsychological paradigm looks at why people make the decisions they do, as well as the neuropsychological processes that contribute to the decisions people make. This view looks less at impulsivity, puts more emphasis on cognitive dynamics and assumes people take risks because they have assessed the future outcomes.
Men vs. women seeking risks
Demographic differences also play a role in risk-seeking between individuals. Through an analysis done by scientists, they demonstrated that men typically seek risks more than women. There are biological differences in men and women that may lead to the drive to seek risks. For example, testosterone plays a large role in risk-seeking in people and women have significantly lower levels of this hormone. This hormone has behavioural effects on aggression, mood and sexual function, all of which can lead to risk-seeking decision making. In their study, they also found that testosterone in excess leads to increased sexual enjoyment, and therefore more of an incentive to engage in risky unprotected sex.
Risk-seeking utility function
Choice under uncertainty is often characterized as the maximization of expected utility. Utility is often assumed to be a function of profit or final portfolio wealth, with a positive first derivative. The utility function whose expected value is maximized is convex for a risk-seeker, concave for a risk-averse agent, and linear for a risk-neutral agent. Its convexity in the risk-seeking case has the effect of causing a mean-preserving spread of any probability distribution of wealth outcomes to be preferred over the unspread distribution.
- ^Hampson, S., (2006). Methods by which childhood personality traits influence adult well-being. Current Directions in Psychological Science, 17, 264-268.
- ^Zuckerman, M., Kuhlman, D. M., Joireman, J., Teta, P., 8c Kraft, M. (1993). A comparison of three structural models for personality: The big three, the big five and the alternative five. Journal of Personality and Social Psychology, 65, 757-768.
- ^Byrnes, P., Miller, C., Schafer, D. (1999). Gender differences in risk taking: A meta-analysis. Psychological Bulletin, 125, 367-383.
- ^O’connor D., Archer, J., Wu, F. (2004) Effects of testosterone on mood, aggression, and sexual behaviour in young men: a double-blind, placebo-controlled, cross-over study. The Journal of Clinical Endocrinology & Metabolism, 89, 2837-2845.
- ^Llewellyn, D. (2008) The psychology of risk-taking: toward the integration of psychometric and neuropsychological paradigms. The American Journal of psychology, 121, 363-376.
Ofer Abarbanel is a 25 year securities lending broker and expert who has advised many Israeli regulators, among them the Israel Tax Authority, with respect to stock loans, repurchase agreements and credit derivatives. Founder of TBIL.co STATX Fund.