I don't really see how those definitions apply to investments and trading.
to me a Risk Adverse trader would limit themselves to sure-thing investments Saving certificates, interest bearing vehicles. The main goal is preservation of capital to the extreme. Something like a little old lady inheriting money and has no other means of income. So they live off of the interest of their safe investments with no real thought to increase them.
A Risk Neutral investor (though I hate that term and wish I could think of another...perhaps "Educated Risk" investor) would be one who thoroughly researches his investment plays and makes an investment only when the investment seems in his/her favour. There is an element of possible failure as one cannot know anything but they are prepared for failure and would take steps in their plan to limit the effect of that failure.
then there is the Risk Seeking investor. This is the investor that seeks big kill, leverages his account to the point that a failure could cause him to seriously cripple his account. The consummate gambler in the bad sense of the word that has poor money management, who shrugs off his losses and glories in his successes.
by my definition I would place myself in the Risk Neutral...By your definition I suppose I'd be in the Risk Seeking as there is little possibility to build on your investment using your definitions for Risk Adverse and Risk Neutral investors.
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I'm sorry to inform you but its not my definition. It's the only definition.
By "my" definition the only way to make money in trading is being risk adverse. Having an edge.
By "my" definition risk seekers are gamblers.
Its not a shame to be one, just I don't think this is the best site for gamblers.
The problem with this is that the spirit of the question is not guided by the definition. By definition no trader could classify themselves as risk seeking, because people don't trade for the sake of losing money.
@baruchs I will give you an example to see if you agree with me: You have a strategy that has positive edge up to $800M of cash but say you only have $400M, so you structure that as a fund product and get GS to write a total return swap on the reference assets of the fund to leverage yourself another 1.5x. You still have positive edge and this seems like a sound investment decision, but you're also being less risk-averse. So having a positive or negative edge has nothing to do with how risk-averse you are. Yes?
Your definitions also have certain flaws, and I don't blame you. I don't have time to finish my post but I'll mention the most important point: Most traders and financial planners define risk in the perspective of wealth, not income, and I think this is a mistake.
But for the old lady who is planning for retirement, should she have an income goal (e.g. $10,000/month by 60) or a wealth goal (e.g. $1M by 60)? i.e. Does she want a steady rate of income or a steady growth in wealth?
The problem is that my, and hopefully most people's, lifestyle preferences are based on my income, not my wealth. Having $2M in my PWM/savings account doesn't tell me whether I should go out today and buy that $24,000 couch from Roche Bobois. But having $20,000 monthly income does give me a very good idea of the sound answer to that. If you're working a 9-5 job, you buy a bigger house or nicer car hopefully when your salary increases, not when your bank account grows in size.
In other words, a lady close to retirement doesn't need a "safe investment" in the traditional sense of that phrase. Let's say she's 40 years and old and expects to live until 80. What she needs is an inflation-protected deferred annuity that makes no payouts until say 20 years, then pays the same amount, adjusted for inflation each year for the next 20 years. (You can replicate this using TIPS). The value of the deferred annuity will fluctuate significantly over the years (meaning that it is a "risky asset" in the traditional sense of that phrase), but the income that it provides will not.
I guess my point is that this discussion is great, but it is interesting to think of the problem not in the context of how much money we can make in a trading strategy, but rather how we can make our lives better based on the content of this discussion. Finance has the potential to make one a considerable sum of money, but it also has the potential to make people's lives much better. I think the latter is more interesting.
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I am averse to your defintion, it has an adverse effect on my understanding of what dealing with such markets requires, which is more about an appreciation of uncertainty, rather than fabricated and transient probabilities. The world's economists never cease to be badly affected by this problem, as they are unable to grasp the inherent nature of fractal scale unpredictability.
Financial markets are not casinos, much as we often compare them to, and risk calculations do not apply in the simplistic manner you portray. Where people and assets are concerned, the evolved brain can make much better use of heuristics and good rules of thumb than it ever will of logic and calculations. The events of the last decade have fully confirmed that.
To the extent that we can identify times and places where an instrument may be more or less likely to do 'something' based on it's history over a certain period and set of conditions, then we are all gamblers, whether we like the name or not. To the extent that we can add a deeper level of market understanding and discipline to go with execution skills may allow some to become traders as well. Imho.
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Risk seeking if you use the proper definition as I'm looking to take risk in the market, however in a quantifiable / controlled manner. As a trader to define yourself as risk averse is a non sequitur in my view, as our job is to seek out risk in order to garner alpha above for example market deposit rates.
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No, I understand you took those definitions from Wikipedia and posted them for comment. I just think that I would offer my 2 cents on them.
And you are right, there is no shame in falling into any category...even the "Risk Averse" as I described it where they investor wants ultra safety to the point of compulsion....they would probably fail at anything else. One manages one's money within one's comfort zone and ambitions for it.
I do take risks but they are controlled risks. Itís the nature of the game that you will have to take some risk in order to receive some gain. I define my risk before taking a trade and get out quickly if it goes against me.
I donít consider myself to be gambling but I am willing to bet 1 dollar to make 3 if my strategy wins 40% of the time.
The person taking the most risk is the person who holds on to a trade that is going against him. I guess you could call that loss adverse rather than risk adverse.
It is hard to find the Truth when you start your search with a preconceived notion of what the Truth will be.
I do know that I loathe gambling, ever since the time when I was 18 and lost my entire week's paycheck ($20) at a game of 3-card monty on 42nd St.
Kahneman says the human mind is hard wired to be risk-averse.
If that's true, then risk aversion is the default setting for all of us, isn't it? Those of us who take our money out of the mattress and put it to work have a greater risk appetite than the norm perhaps.
IMO the traders who self-identify as "risk averse" are people with higher risk appetite as well as higher risk intelligence. They have learned (or do so naturally) to focus on risk and assess and quantify it.