Risk preference in finance

In economics and finance, risk preference commonly refers to the tendency to choose an action that involves higher variance in potential monetary outcomes, relative to another option with a lower variance of outcomes (but equal expected value).

1. What is financial risk preference?
2. What are the three risk preferences?
3. How do you identify risk preferences?
4. Are risk preferences stable?

What is financial risk preference?

Risk preference is your tendency to choose a risky or less risky option. Generally, economists and financial professionals apply the concept of risk preference to investors and economics, but you can also apply risk preference to any decision you make that involves risk.

What are the three risk preferences?

Among the risk we can separate into three categories of basic behaviours risk preferences – risk neutral, risk seeking and risk averse. Those categories specify the level of risk, which is generally acceptable. Risk is variable, because of the expected return; it is chance to win or loss.

How do you identify risk preferences?

Risk preferences are measured using surveys or incentivized games with real consequences. Reviewing the different approaches to measuring individual risk aversion shows that the best approach will depend on the question being asked and the study's target population.

Are risk preferences stable?

Temporary changes in self-control, stress, and emotions induce only temporary, typically small changes in risk preferences. As a result, individual risk preferences are moderately stable over time and sufficiently persistent to be considered an individual trait.