Risk-seeking

In economics, finance, and psychology, '''risk-seeking''' (also called '''risk-loving''' or '''risk preference''') refers to a behavioral tendency to prefer uncertain options with potentially higher rewards over safer alternatives with lower expected value. ^[1] In other words, risk-seeking individuals derive greater satisfaction or perceived utility from taking chances, even when the probable outcome may be less favorable. This is a big issue seen in stock trading, for example, in where people take the risk to either hold or sell their stocks depending on past market trends.

Within behavioral economics, risk-seeking is often compared with risk aversion and analyzed using expected utility theory and prospect theory. According to these models, individuals’ risk preferences vary depending on how potential outcomes are framed as gains or losses, as well as the psychological weighting of probabilities. ^[2]

The Utility Function and Risk-Seekers

Choice under uncertainty is when a person facing a choice is not certain of the possible outcomes or their probability of occurring. ^[3] The standard way to model how people choose under uncertain condition, is by using expected utility. In order to calculate expected utility, a utility function 'u' is developed in order to translate money into Utility. ^[3] Therefore, if a person has '${\displaystyle x}$' money, their utility would be ${\displaystyle u(x)}$. This is explored further when investigating potential "prospects". A prospect, in this context, is a list of expected payoffs and their probabilities of occurring. ^[3] A prospect is summarized within behavioral economics, risk-seeking is often contrasted with risk aversion and analyzed using expected utility theory and prospect theory. According to these models, individuals’ risk preferences vary depending on how potential outcomes are framed as gains or losses, as well as the psychological weighting of probabilities. ^[4] using the form; ^[3]

${\displaystyle ProspectA=(p_{1},x_{1};p_{2},x_{2};...;p_{n},x_{n})}$

The overall expected value of the prospect (A) is subsequently expressed as; ^[3]

${\displaystyle V(A)=\sum _{i=1}^{n}p_{i}x_{i}}$

The expected utility, U(A), of the prospect is then determined using the below formula; ^[3]

${\displaystyle U(A)=\sum _{i=1}^{n}p_{i}u(x_{i})}$

The utility function is convex for a risk-lover and concave for a risk-averse person (and subsequently linear for a risk-neutral person). ^[3] Subsequently, it can be understood that the utility function curves in this way depending on the individual's personal preference towards risk. ^[3]

Below is an example of a convex utility function, with wealth, '${\displaystyle x}$' along the x-axis and utility, '${\displaystyle u(x)}$' along the y-axis. The below graph shows how greater payoffs result in larger utility values at an increasing rate. Showing that the person with this utility function is "risk-loving".

Alternatively, below is an example of a concave utility function, with wealth, '${\displaystyle x}$' along the x-axis and utility, '${\displaystyle u(x)}$' along the y-axis. The below graph again display's an individual's utility function, however this time lower payoffs have a larger utility with respect to the original payoff (or "wealth") value. The utility values, although still increasing, do so as a decreasing rate. Showing that this person is "risk-averse".

It is important to note that for prospect theory value functions, risk-seeking behavior can be observed in the negative domain ${\displaystyle x<0}$, where the functions are convex for ${\displaystyle x<0}$ but concave for ${\displaystyle x>0}$.

Psychology

Child personality traits' effect on adulthood

Research in psychology has explored the relationship between personality traits, developmental factors, and risk-seeking behavior across the lifespan. Studies suggest that low levels of childhood conscientiousness and higher impulsivity are associated with greater risk-taking tendencies in adolescence and adulthood. ^[5] Individuals who exhibit poor impulse control are more likely to engage in behaviors with higher potential for harm, including substance use and reckless driving, whereas those with high conscientiousness tend to demonstrate more cautious and future-oriented decision-making. ^[6]  

Risk-seeking behavior often peaks during adolescence, a developmental stage marked by increased sensitivity to reward and social influence. ^[7] Zuckerman’s sensation-seeking theory describes risk-taking as part of a broader personality dimension reflecting the pursuit of varied, novel, and intense experiences, even at the risk of physical or social harm. ^[8]

Psychometric paradigm

The psychometric paradigm explores what stable personality traits and risk behaviors have in common with an individualistic approach. ^[9] Zuckerman's (1994) sensation seeking theory is important in assessing the causative factors of certain risk-seeking behaviors. Many risk-seeking behaviors justify humans need for sensation seeking. ^[9] Behaviors like adventurous sports, drug use, promiscuous sex, entrepreneurship, gambling, and dangerous driving to name a few both represent sensation seeking, as well as risk seeking. Impulsivity has been linked to risk-seeking and can be described as the desire to indulge in situations with a potential reward, and little to no planning of the potential punishments of loss or reward. ^[9] Impulsivity has also been linked to sensation seeking and in recent theories have been combined to form a higher order trait called impulsive sensation seeking. ^[9]

Neuropsychological paradigm

The neuropsychological paradigm looks at why people make the decisions they do, as well as the neuropsychological processes that contribute to the decisions people make. This view looks less at impulsivity, puts more emphasis on cognitive dynamics and assumes people take risks because they have assessed the future outcomes.

Gender differences

Risk-seeking youth in Soweto (South Africa)

It has been demonstrated that men typically seek risks more than women. ^[10] There are biological differences between men and women that may lead to the drive to seek risks. For example, women have significantly lower levels of testosterone, which plays a large role in risk-seeking. This hormone has behavioral effects on aggression, mood and sexual function, all of which can lead to risk-seeking decision making. In their study, they also found that testosterone in excess leads to increased sexual enjoyment, and therefore more of an incentive to engage in risky unprotected sex. ^{[11] [12]}

References

1. Kahneman D, Tversky A. Prospect theory: An analysis of decision under risk. Econometrica. 1979;47(2):263–292. doi:10.2307/1914185.
2. Khan A. Expected utility versus cumulative prospect theory in an evolutionary model of bargaining. J Econ Dyn Control. 2022;137:C. doi:10.1016/j.jedc.2022.104332. Available from: https://doi.org/10.1016/j.jedc.2022.104332
3. Cartwright, Edward (2018). Mr. Abingdon, Oxon: Routledge. pp. 97–100. ISBN   9781138097124.
4. Slovic P. Perception of risk. Science. 1987;236(4799):280–285. doi:10.1126/science.3563507.
5. Friedman HS, Tucker JS, Tomlinson-Keasey C, Schwartz JE, Wingard DL, Criqui MH. Does childhood personality predict longevity? J Pers Soc Psychol. 1993;65(1):176–185. doi:10.1037/0022-3514.65.1.176.
6. Terracciano A, Costa PT Jr. Smoking and the five-factor model of personality. Addict Behav. 2004;29(5):791–796. doi:10.1016/j.addbeh.2004.02.001.
7. Steinberg L. Risk taking in adolescence: New perspectives from brain and behavioral science. Curr Dir Psychol Sci. 2007;16(2):55–59. doi:10.1111/j.1467-8721.2007.00475.x.
8. Zuckerman M. Behavioral Expressions and Biosocial Bases of Sensation Seeking. New York: Cambridge University Press; 1994.
9. Zuckerman, M., Kuhlman, D. M., Joireman, J., Teta, P., 8c Kraft, M. (1993). A comparison of three structural models for personality: The big three, the big five and the alternative five. Journal of Personality and Social Psychology, 65, 757-768.
10. Byrnes, P., Miller, C., Schafer, D. (1999). Gender differences in risk taking: A meta-analysis. Psychological Bulletin, 125, 367-383.
11. O'connor D., Archer, J., Wu, F. (2004) Effects of testosterone on mood, aggression, and sexual behaviour in young men: a double-blind, placebo-controlled, cross-over study. The Journal of Clinical Endocrinology & Metabolism, 89, 2837-2845.
12. Llewellyn, D. (2008) The psychology of risk-taking: toward the integration of psychometric and neuropsychological paradigms. The American Journal of psychology, 121, 363-376.