Risk Seeking Explained: Breaking Down the Opposite of Risk Averse

Imagine you just received a $5,000 bonus. Now you are thinking about what to do with this unexpected money you’ve just got. Here are your options:

1. Do you want to play it safe and put the money in a savings account, earning a steady but small amount of interest?
2. Do you want to invest it in a balanced mutual fund, focusing on the average return and not worrying too much about market ups and downs?
3. Or maybe you are feeling adventurous so you want to go all in on something like cryptocurrency or even buy lottery tickets, hoping for a big payoff while knowing you might lose it all.

If you’re risk-averse, you will probably put your money in a savings account. A risk-neutral person might invest it in a balanced mutual fund. But if you’re the opposite of risk-averse, that is, risk-seeking, you would buy cryptocurrency or lottery tickets¹Kahneman, Daniel, and Amos Tversky. “Prospect theory: An analysis of decision under risk.” Handbook of the fundamentals of financial decision making: Part I. 2013. 99-127.. Your choice depends on how comfortable you are with risk and what you value most—security, a balanced approach, or chasing excitement²Barberis, Nicholas C. “Thirty years of prospect theory in economics: A review and assessment.” Journal of economic perspectives 27.1 (2013): 173-196.!

It seems quite straightforward, isn’t it?

Well, it can be a bit more complicated than it seems. Because the best risk preference will and should always change to the circumstances you are in a given moment. Understanding these preferences can help tailor financial decisions to any situation.

Let’s dive deeper to understand why the opposite of risk-averse would not be as bad a preference as it might seem sometimes.

What Does It Mean to Be Risk-Averse?

People hate to lose.

So it makes sense for some people to avoid the ‘risk’ of losing. They prefer certainty over uncertainty, even though the latter could offer a better outcome.

Roughly speaking, this is the definition of risk aversion.

More accurately, risk aversion can be defined as:

Someone is said to be risk averse if they are disinclined to pursue actions that have a non-negligible chance of resulting in a loss or whose benefits are not guaranteed³What Is Risk Aversion?, H. Orri Stefansson and Richard Bradley.

Risk-averse people prefer stability over opportunity. Of course, the decision to be risk-averse depends on many factors. But oftentimes it makes sense to be risk averse because the pain of losing often outweighs the joy of equivalent gains.

Losing something makes you twice as miserable as gaining the same thing makes you happy

Nudge by Richard Thaler

Richard H. Thaler and Daniel Kahneman are the leading researchers working in this area. As Richard Thaler describes it, “Losing something makes you twice as miserable as gaining the same thing makes you happy⁴Nudge by Richard Thaler“

Kahneman, Knetsch, and Thaler ran an experiment to prove the practicality of risk aversion⁵Kahneman, Knetsch, and Thaler, 1991. In this experiment, they handed over coffee mugs to a class of students. Only some students in the class got the mugs and some didn’t. And then the mug owners were invited to sell their mugs and the ones who did not have mugs were invited to buy them. The mug owners demanded roughly two times the price as others demanded to buy a mug.

We can see this behaviour often in real life.

Examples of risk aversion in real life are:

• Opting for stable employment instead of pursuing a risky entrepreneurial venture.  
• Preferring fixed-rate mortgages over variable-rate ones, even with potentially lower rates.  

The opposite of risk-averse: Risk seeking

Now that we understand what it means to be risk averse, let’s look at the opposite of risk averseness — that is, risk-seeking.

The term is almost self-explanatory, but it gets more complicated once we dig deeper into the concept.

One is said to be a risk seeker if one is willing to embrace the uncertainty of a situation to seek higher rewards. Unlike the ones who are risk averse, risk seekers are less ‘threatened’ by the face of potential losses.

Risk seekers tend to focus more on the gains. They prioritize potential rewards over potential losses. And, consequently, they are driven by the attraction to uncertainty. High-risk scenarios, like gambling or speculative investments, appeal to risk-seekers. 

For instance, entrepreneurs are a good example of risk seekers. About 50% of startups fail within the first five years. Yet, entrepreneurs are willing to take that risk for the long-term reward.

Another example would be high-stakes investments such as betting on volatile cryptocurrencies or penny stocks.

These types of risks are often motivated by psychological factors rather than rational calculations. And they significantly deviate from rational decision-making.

The psychology behind risk seeking

Why people make such risk-seeking decisions is an ongoing debate in behavioural economics. Here are some possible key drivers.

Prospect Theory (Kahneman & Tversky):

As explained above, people are more prone to gain than to lose the same item. Kahneman and Tversky argue that people tend to take more ‘riskier’ actions to avoid losses. A good example of this would be to double down on a declining cryptocurrency. When someone is in the ‘losing domain’, they often switch to ‘risk-seeking behavior’ hoping that it’ll quickly reverse the loss into a gain⁶Kahneman, Daniel, and Amos Tversky. “Prospect theory: An analysis of decision under risk.” Handbook of the fundamentals of financial decision making: Part I. 2013. 99-127..

Overconfidence Bias:

This behavior can often be seen in behavioral finance, where overconfidence is shown to drive investors to underestimate risks and overestimate their ability to predict outcomes.

Many investors feel confident they can “beat the market” by perfectly timing their trades or spotting hidden gems, like penny stocks or new cryptocurrencies. This optimism can often lead them to take risks on assets that are unpredictable and highly volatile, sometimes without fully considering the potential downsides.

Sunk Cost Fallacy:

The sunk cost fallacy is when we stick with something because we’ve already spent a lot on it, even if quitting would be better. The sunk cost fallacy helps produce mental inertia, meaning a strong desire to stick with your current holdings⁷Nudge by Richard Thaler.

For instance, in a financial venture, once money is invested, the psychological difficulty of accepting a loss can push investors to “ride out” risky positions, even when the odds are against their favour.

Fear of Missing Out (FOMO):

Success stories, especially imposed by mainstream media, make people make poorly calculated decisions. One of the best examples from the last decade is the Bitcoin stories. The media was covering news about how people made millions starting from nothing. This ‘hyped’ news made people make risky decisions, overlooking the potential uncertainties.

Research shows that Bitcoin price usually goes up when heavy media attention is given⁸Herz, Bernhard, Jonas Groß, and Jonathan Schiller. “Libra–Concept and Policy Implications.” (2019).. However, such gains are very rare, and many latecomers face losses when the market cools down.

Illusion of Control:

The illusion of control in economics refers to people believing they have more control over outcomes than they actually do⁹Yarritu, Ion, Helena Matute, and Miguel A. Vadillo. “Illusion of control.” Experimental psychology (2014)..

In other words, people are often fooled by randomness.

When it comes to investing, this can lead people to think they can predict or influence how the market would behave, even though it’s highly unpredictable.

For instance, an investor would think that they can accurately predict the stock market dynamics by carefully analyzing the statistics. But markets are driven by numerous unpredictable factors — many of which are completely randomized. One idea that they can ‘beat the market‘ therefore is often rooted in overconfidence, not skill.

Risk-Neutral: The Third Risk Preference

Now that we’ve covered the opposite of risk aversiveness, let’s take a look at the ‘middle ground’, that is, risk neutral.

People who are ‘risk-neutral’ make decisions with no emotional bias. They only focus on the expected outcome. They neither shy away from risk nor chase it; their choices depend purely on the probability¹⁰Figlewski, Stephen. “Risk-neutral densities: A review.” Annual Review of Financial Economics 10.1 (2018): 329-359..  

They stay away from emotional factors like fear or excitement.

One example of risk-neutral behavior is making insurance decisions based merely on statistics. If you have personally experienced an earthquake recently, you are most likely to buy insurance even though the occurrence of an earthquake is statistically extremely rare(Nudge by Thaler).

A risk-neutral individual combat the fear of finding themselves with another earthquake because they know it’s not statistically extremely unlikely — so they would not buy insurance or would not upgrade to a premium package.

How to Identify Your Risk Preference

It is clear that knowing when to be risk-averse or to be risk-seeking or risk-neutral takes some serious critical thinking. This is not to say that you should always stick one one risk preference. We live in a dynamic world with unpredictable outcomes. The best decision to take, given the circumstances, can change in a second¹¹Arslan, Ruben C., et al. “How people know their risk preference.” Scientific reports 10.1 (2020): 15365..

However, there should be a systematic way to approach this dilemma.

Here are 3 steps to identify the most suitable risk preference for any situation.

Step 1: Self-Reflection

Think about the last time you made a critical decision. Did you consider:

1. Your safety (and/or the safety of other people who might have been involved in the decision-making)
2. Was your decision logical? Does it make sense in terms of statistics and other reliable sources? Or did you take a bold risk?
3. Did you consider the outcome-to-input ratio was worth it?

Carefully answering these questions and reflecting on them will help you understand your risk assessment behavior. If there are any loopholes in your logical decision-making, it’s best to keep them in mind when making your next big financial decision.

But this is just the start.

Now lets get technical.

Step 2: Use risk assessment tools

Even though you have a ‘qualitative idea’ about your risk assessment, it would help you immensely if you use ‘quantitative’ risk assessment tools.

Even a simple Excel sheet can go a long way.

However, there are numerous open-source risk assessment tools available for the public.

1. Vanguard’s risk assessment tool for personal investing
2. Morningstar’s Risk Profiling and Risk Scoring Tools
3. Personal finance assessment quizzes

By using these tools, you get a clearer picture of how much risk you can handle emotionally and financially. This helps you build an investment plan that matches your personality and goals, reducing stress while keeping you on track.

Step 3: Seek Expert Advice

It’s always best to seek one-to-one financial advice before making a big financial decision. Even if financial consulting cost money, it would be worth in the long run.

Bottom line

Our risk preferences shape how we deal with uncertainty. The term loss aversion describes our tendency to fear losses more than we value equivalent gains. The opposite of risk aversion: risk-seeking and risk-neutral, reveal different ways people handle risk.

These preferences give us insight into decision-making frameworks, especially for high-stakes decisions like investments or career moves. No matter what kind of risk taker you are, it’s important to understand your risk profile so you can make the right decisions.

It’s important to remember that a good financial decision isn’t about controlling the market, but about understanding it. The key to outsmarting the system is to diversify your portfolio, stay patient, and focus on long-term goals. It doesn’t matter how much control we think we have over the market, the market doesn’t play favourites!

Subscribe to our newsletter for more practical insights into risk management and financial planning. Have you analyzed your risk preferences? Share your experiences in the comments—we’d love to hear from you!

Further Readings

1. Thaler, Richard H., and Cass R. Sunstein. Nudge: The final edition. Yale University Press, 2021.
2. Daniel, Kahneman. Thinking, fast and slow. 2017.
3. Taleb, Nassim Nicholas. Fooled by randomness: The hidden role of chance in life and in the markets. Editeurs divers USA, 2016.

• 1
  Kahneman, Daniel, and Amos Tversky. “Prospect theory: An analysis of decision under risk.” Handbook of the fundamentals of financial decision making: Part I. 2013. 99-127.
• 2
  Barberis, Nicholas C. “Thirty years of prospect theory in economics: A review and assessment.” Journal of economic perspectives 27.1 (2013): 173-196.
• 3
  What Is Risk Aversion?, H. Orri Stefansson and Richard Bradley
• 4
  Nudge by Richard Thaler
• 5
  Kahneman, Knetsch, and Thaler, 1991
• 6
  Kahneman, Daniel, and Amos Tversky. “Prospect theory: An analysis of decision under risk.” Handbook of the fundamentals of financial decision making: Part I. 2013. 99-127.
• 7
  Nudge by Richard Thaler
• 8
  Herz, Bernhard, Jonas Groß, and Jonathan Schiller. “Libra–Concept and Policy Implications.” (2019).
• 9
  Yarritu, Ion, Helena Matute, and Miguel A. Vadillo. “Illusion of control.” Experimental psychology (2014).
• 10
  Figlewski, Stephen. “Risk-neutral densities: A review.” Annual Review of Financial Economics 10.1 (2018): 329-359.
• 11
  Arslan, Ruben C., et al. “How people know their risk preference.” Scientific reports 10.1 (2020): 15365.