Due to this, in the world of the economy if you are going to invest your capital, it is good that you are clear that there are types of investors. In this article we will explain the difference between risk-averse and risk-neutral . So you will have an idea with which you identify.
Investor
First of all, what is an investor ? Well, in reality it can be anyone who sets aside capital or money for a certain investment. Its purpose is, of course, a return on profits.
What is the Difference Between ‘Risk Averse’ and ‘Risk Neutral’ in Economics?
When investing, they usually use several markets, because they seek to obtain profits from different investments. Of course, something you should keep in mind is that what you get will depend a lot on your tolerance for risk.
Risk Averse Investor
They are those individuals who prefer a safe situation , although their profitability is minimal. The vast majority of people, due to their behavior when investing, end up fitting into this group. So you will look for a way to avoid taking risks for free. They even contemplate the option of making money without investing.
For example, when you are presented with 2 investment opportunities with equal benefits, the risk-averse investor will generally have this behavior, when thinking about it, he will prefer the one that reports less risk. In short, you will always demand higher returns with minimum risk.
Risk neutral
In this case, we refer to a person who does not care to take the risk or not to take it , as long as the expected value is the same. This indicates that when making decisions, when investing they do not consider risk; But for them the most important are other parameters such as the rate of return (profits) and market momentum. In this aspect, you may notice that financial experience is important.
Differences
To help you be clear about these terms, we are going to illustrate it for you. This way we will be able to easily distinguish the differences between these 2 behaviors. We will present you 2 different scenarios. For example:
- The risk averse . In a game center you will not invest in a game whose expectation is equal to 0 or negative. Sure, nobody wants to play to lose. But also, they tend to discard, not always, games that give them a positive possibility. Why? Here we can identify the difference. Because they have the mentality of avoiding the risk of losing what they already have. So if you don’t play at least they’ll keep what they have.
- The risk neutral . In the games center, games that report a negative balance are not approached. But if you are open to games with positive expectations, why? Because although it supposes a risk, as we mentioned previously, they do not contemplate the risks; but the return of its benefits.
We have 2 people, each one has the same possibilities to invest. Both have 1,000 euros. Investors who are identified as having a risk-averse behavior, consider risk variables such as safe interest rates and inflation in their environment.
Considering these details, they prefer to invest in a government Treasury bond. Why? Because of their solidity they have a sure return of 3% interest. Those who identify themselves as risk neutral, since they do not consider risk, but rather benefits , choose to buy shares in a new company in full development. Although it has risks, if it is successful, its profitability will be higher than the one invested in Government Bonds.
With these examples you will notice that it is very easy to distinguish the differences. We hope that studying these behaviors will motivate you to be risk-neutral . In fact, it is the ideal behavior , because although it is a path of possible losses, you can also take advantage of opportunities to win.
Unfortunately, many companies such as Insurance, their success lies in taking advantage of people’s fears. It feeds on the fear of losing something. As a result of this, people end up paying high annual fees to keep what they have. We hope they motivate you to act, you can also know the demographic characteristics of consumers to further expand the economy issue.
