Risk Tolerance

With respect to trading activity, sensation seeking is distinctive from risk aversion.  For example, the willingness to take on an undiversified trading strategy may be encouraged by the consumptive value associated with sensation seeking, yet deterred by a high degree of risk aversion.  The mix of these two opposing forces may define the degree of diversification.  According to this logic, the two ideas are related, but quite different and possibly in opposition when determining actual behavior.

Not all scholars on the subject agree on exactly what risk is and the best way to assess it.  There does seem to be some agreement that people view different kinds of risk differently.  You may enjoy skydiving and racecar driving on the weekend, but you cannot stand the idea of losing money during the trading week.  In other words, it is probably a mistake to infer anything about your financial risk tolerance from your other risky activities that do not involve investing.


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Last Updated: 6/25/2018