Investors are mainly of two types, Risk Seeking or Risk Averse, and investors when they plan to start their investment, they always have a dilemma, what type of behavior they should opt.
Let us first understand what both these behaviors do, Risk Seeking or Risk Averse exactly mean.
Risk Seeking Vs Risk Averse
Understand it through an example, in any investor get two options, to choose from, one an investment that gives a sure outcome, and second, an investment that offers a better-expected value. If a person chooses option one, that is sure outcome over a gamble of getting the better-expected outcome, then the person has risk-averse behavior. But if he chooses option two, he is risk-seeking.
Which Behavior Is Best To Opt?
Well, if you ask an expert, his answer would be “We should be both risk-seeking and risk-averse”.
People generally behave risk averse when their focus is mainly towards profit and tend to choose a sure profit over a chance to achieve a bigger profit.
If we talk about risk-seeking behavior, then people generally opt for it when there is a loss. People are not willing to cut their loss and accept a sure loss when there is a small chance of making a break-even.
If we overview then people mostly are risk averse when they want sure profit and very few people are attracted to risk-seeking, as they averse to a sure loss.
When To Be Risk-Seeking? And When To Be Risk Averse?
You might have understood that for a successful investment, an investor needs to opt for both behaviors, risk-averse, and risk-seeking, as per his portfolio, goals, and most important market trends. Generally, investors must be risk-seeking when we are in profit and we should be risk-averse when we are in loss.
In case if the investors follow inverse that is if they become risk-seeking in the domain of loss and risk-averse in the domain of profit, then there are chances that a manageable loss can turn into an unmanageable loss.
So basically, an investor neither must be purely risk-seeking nor he must be purely risk-averse. Instead should be risk-seeking in the domain of profit and risk-averse in the domain of loss.