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Risk seeking or Risk averse?
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Risk seeking or Risk averse?

  #21 (permalink)
Market Wizard
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Big Mike View Post
I wish I could see a correlation chart between the number of people who selected 'risk averse' with the size of their stops and targets ....

There seems to be a real disconnect when people define risk, they'll say they are "risk averse" but yet their actions demonstrate they are making poor decisions and inherently very risky decisions when viewed from a more macro perspective.


tturner86 View Post
I believe that risk is bigger then most traders think.

I would say that I am risk seeking and risk adverse. Both have their place. You have to seek risk to make money, but you choose when to seek the risk. By limiting how and when you seek risk, you can actually be risk adverse and guard your profits and account.


shodson View Post
Per this definition, then I would change to risk averse. However, my perception of risk averse people are people that don't like to take risks or are avoid taking risks, like not trading at all, ever, like most of the people I know,

I think all traders have to be risk seeking, but take quality risks. To me, seeking risk is seeking profitable opportunities, not gambling action, but maybe not to others.


ratfink View Post
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. ...

Financial markets are not casinos, much as we often compare them to, and risk calculations do not apply in the simplistic manner ....


sands View Post
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.

It took me a long time to decide how to respond to this poll. Normally, I just fire off an answer, and sometimes explain it. (By the way, I eventually chose "Risk Averse".) But this was hard. Here's why:

1. The economic purpose of futures markets was originally to allow producers and buyers of physical commodities ("commercials") to offload market risk to traders who were willing to take it, by hedging a physical or cash position against a futures position to lock in a delivery price. The traders taking the other side would either absorb the loss or make the profit from the price fluctualtions, but the physical producers or buyers would be insulated from market risk, either way. This carried over into the financial/equity/currency markets, because large holders will often seek hedging or other strategies, and the futures markets facilitates that. (Sorry about the history lecture.... )

Therefore, we are all risk-seekers, unless we are putting on fully hedged positions. There is no opportunity otherwise.

2. Given the inherent risk- (opportunity-) seeking behavior of all futures traders, it is also possible to be crazy. There is a good reason that the large "commercials" (or equities- or bond-holders) want to offload market risk: it's risky. Also, they know a lot more about their business than almost any futures trader. And they are the ones we are going up against.

In this context, to be "risk seeking" is to accept absurd risks. It's like sitting down at a poker game with real professionals, and betting against them. The big players are still in business; most people who have tried their hand at futures trading are not. There's a reason for that.

3. It is still possible to make money in the futures markets. Traders will succeed if they take on risk that others don't want to have, and are right more often than not. If you are consistently on the right side of that equation, you will consistently take money out. (The market doesn't care either way, since someone will always take the other side of any hedging transaction.)

4. That means that we have to understand the underlying risk-assuming nature of futures trading, and to seek to limit the risks to what is reasonable and manageable.

------

There is a never-ending quest, apparently, for the perfect system, which for some reason has never appeared, despite all the trying. (I don't have it, either.... ) A pretty good idea is to take some fairly reasonable system, and to control the risks that come from trading in the futures market at all, while exploiting the opportunities that being in the market gives you access to.

So, in that sense, I am a risk-averse, risk-seeking trader. -- But in different ways.

That's why it was hard to answer the question....

(Thanks, by the way, to all the people I quoted above, and more, who helped me figure out what I thought about this question.)

Bob.

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  #22 (permalink)
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Limitless100 View Post
Good post!

You're welcome.

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  #23 (permalink)
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bobwest View Post
There is a never-ending quest, apparently, for the perfect system, which for some reason has never appeared, despite all the trying. (I don't have it, either.... ) A pretty good idea is to take some fairly reasonable system, and to control the risks that come from trading in the futures market at all, while exploiting the opportunities that being in the market gives you access to.

So, in that sense, I am a risk-averse, risk-seeking trader. -- But in different ways.

That's why it was hard to answer the question....

Bob.

Great (risk) analysys and explanation, couldn't agree more !

"If you don't design your own life plan, chances are you'll fall into someone else's plan. And guess what they have planned for you? Not much." - Jim Rohn
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  #24 (permalink)
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I believe the the terminology was not so much about personality types but more so to show how we are all hardwired to make inconsistent/irrational decisions when placed in different settings.

1. Risk Seeking - As wealth goes up, we are are willing to bear higher uncertainty trades/propositions shown by the convex curve.

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2. Risk Adverse - As wealth goes up, we are less willing to take on more uncertain risks shown by the concave curve.

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2 Israeli pyschologists, Kahneman and Tversky discovered human short comings with rational decision making that we would display risk-aversion when offered a choice in one setting and then turn into risk-seekers when offered the same choice in a different setting. This asymmetry in the way we make decisions came to be known as Prospect Theory. So instead of purely being just risk-adverse or risk-seeking, both behaviors surface under different settings as shown by the S-curve below.

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In a practical context, a trade has an 80% chance of losing $4000 and 20% chance of breaking even. There is however a 100% chance of losing $3000 if you should cut loss now. Their experiment from prospect theory showed 92% of the people chose to gamble with uncertainty despite the expected value being -3.2K vs the certainty of a lower $3k loss.

On the flip side, given a 80% chance to make $4k and a 20% chance to breakeven vs a 100% choice to make $3k, you will find most people taking the 100% choice of taking $3k despite the expected value of the uncertain gamble being higher at 3.2k.

This showed that framing the context is important. When the context of choices involved losses, we would be risk seekers always willing to take the chance as long as there was a choice to reduce losses. When the context of choices involved gains, we would be risk adverse chosing those options with higher certainty. This inconsistent human behaviour takes place not only in financial markets but across all other areas. They go on to explain that the underlying driving force for both inconsistent behavioural types is loss aversion. "It is not so much that people hate uncertainty-but rather, they hate losing." I'm sure if the poll had a 3rd choice of being loss averse, all of us would vote on it. Losses induce much more pain than the pleasure derived from gains.

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  #25 (permalink)
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these open ended questions make for long debates but really it's just a confusion of semantics. I picked risk adverse because I believe timing reduces risk. If the market begins to do something that I'm not familiar with I'm not just going to experiment with money to find out if I'm right. The majority of profitable trading is really a function of time spent not trading and precisely timing when to trade when key criteria are met.


If I were to give everyone a chart to mark up the best entry during that day to take a trade I'd see a nice trade in hindsight. Now if I were to say mark up the best entry everyday for a week I'd see a varying degree of nice entries one per each day. Now lastly if I were to say mark up 5 of the best entries anywhere throughout the week guess what? I guarantee not all 5 of those entries would be each on a different day. Now think about that for a second and apply it to time. Successful opportunities in the market don't present themselves equidistant from each other and thus it's wise to be adverse to 1. a situation involving exposure to danger, which is most of the time.

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  #26 (permalink)
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Itchymoku View Post
these open ended questions make for long debates but really it's just a confusion of semantics.

Just driving conversation on important topics...

Mike

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