Research And Describe Risk Aversion And Risk Tolerance - 825 Words

Research And Describe Risk Aversion And Risk Tolerance (Essay Sample) Content: Risk tolerance and risk aversionInstitutional affiliationDateIntroductionRisks form part of the daily life. They can be defined as the chances of loss resulting from the uncertainties that lie upon the future happenings. They are witnessed in different areas depending on the carried activities. In the case of an investment, the risk involved is characterized by a possibility of a negative outcome that yields to losses. With the use of good rational and assessment methods, risks can be quantified and grouped to certain levels. Exploitation of the different risk levels and decision making depends on the risk tolerance level of an individual which predetermines the risk aversion factor as discussed below.Playing the gameThis would mean risking thirty thousand dollars with the hope of getting one hundred thousand dollars which is 233.33% of the amount invested. The gain would take less than five minutes to be achieved. The deal looks interesting, and someone might be temp ted to try it. The challenge in this short-term and hyper-profitable venture is figuring out a single door out of three doors that lead one to the one hundred thousand dollar fortune. It sounds more like a gamble where one is placing a bet with hope and conviction of realizing positive results. The probability of identifying the correct door is a third which indicates that the possibility of gaining from the investment is 33.33%. Therefore, the possibility of losing everything is two-thirds which indicate the uncertainty levels, that is, 66.67%.The risk factor in playing the game is significantly high which is directly proportional to the gains. In risk tolerance principle, the levels of risk tolerance are classified into three with respect to the behavior of the investors, that is, conservative, aggressive, and moderate investors (Hanna, Gutter Fan, 2001). For a conservative investor who is only willing to invest the capital where the risk levels are low irrespective of the low pe rcentage gains, he/she would opt out of the game which is often referred to as risk aversion. The conservative investor is much concerned with the process rather than the outcome. An aggressive investor geared to attain highest possible gain in the shortest period would most likely end up risking his/her capital with little thought since he/she is more interested in the outcome rather than the process (Hvide Panos, 2014). The moderate investor will weigh the two options and consider other factors before making a decision. Unlike the conservative investor, he/she is equally interested in the outcome as well as the process.Walk away the gameWalking away the game means that the potential investor prefers to remain at his/her financial position rather than making a gain or a loss thus choosing risk aversion. It is an obvious reason the person in question is not against the idea of trying a possible gain. He/she is quite certain of the levels of risks involved that if the outcome tends to the worst, he/she will end up losing everything. Probably the little money he possesses if invested otherwise in a well-calculated and assessed risk could yield to appreciable gains.This is true for a case where the risk tolerance is low as in the case with the conservative moderator. However, to realize such an outcome, the investor will be forced to take a longer period. The low tolerance levels justify his/her actions thus one is comfortable with the walk away decision which in this case is high-risk aversion levels. For an aggressive investor, walking away the deal will be faced with high negative energy. The high-risk tolerance levels of the aggressive investors reduce the chances of the risk aversion (Frijns et al., 2013). Therefore, in the wake of a walk away, the per...