What it means
Risk seeking is about what people actually do, not what they say. When faced with a choice, a risk seeking person takes the more uncertain path and accepts a lower expected value to do so.
The behaviour can be a deliberate preference or a reaction to circumstances. Behavioural finance has found that attitudes to risk change depending on whether people are facing gains or losses.
Many people are cautious when protecting a profit but become risk seeking when they are already behind. A trader down $50,000 may take a larger gamble to win it back instead of accepting the loss.
This matters for businesses because risk seeking can quietly damage results. A manager chasing a missed target may approve a long-shot project, and a salesperson paid on big deals may over-promise.
Strong controls, such as position limits and independent approval, are designed to keep these impulses in check. There are healthy forms too.
Entrepreneurs and venture investors deliberately seek risk because the payoffs can be extremely high, and a company that never takes risk may fall behind competitors. The aim is to be risk seeking in a planned way, with losses limited to an amount the business can afford.
A nuance is the difference from a risk lover. A risk lover is a theoretical label for someone with a convex utility curve, while risk seeking is a pattern of behaviour that may come from loss aversion, overconfidence or incentives.
Awareness is the first defence. Teams that understand how losses push people toward bigger bets can design reviews that look at decisions before the outcome is known.
A simple rule such as a pause before any trade designed to recover a loss can prevent a bad quarter becoming a disaster.
In practice
Real-world examples.
Example
A fund manager is 8% behind her benchmark in November. She loads up on volatile shares hoping for a big finish, accepting a lower expected result.
Example
A retailer facing a cash shortfall of $300,000 rejects a certain $250,000 refinancing offer. Instead he stakes everything on a holiday sale that could raise the full amount or nothing.
Example
A software start-up founder turns down a safe acquisition offer to chase a much larger exit. He accepts that the company may fail in exchange for the chance of a far bigger payout.
Formula
Calculation
The cost of risk seeking can be measured as the expected value given up:
Expected Value Sacrificed = Expected Value of Safe Option - Expected Value of Risky Option
Worked example: A manager can take a guaranteed $55,000 or a gamble with a 50% chance of $100,000 and a 50% chance of $0.
Expected value of the safe option = $55,000
Expected value of the gamble = (0.5 x $100,000) + (0.5 x $0) = $50,000
Expected value sacrificed = $55,000 - $50,000 = $5,000
A manager who picks the gamble is accepting $5,000 less on average for the chance of the larger payoff, which is a risk seeking choice.
Scale this up and the cost becomes serious. If a desk makes 20 such choices in a year and each gives up $5,000 of expected value, the expected cost is 20 x $5,000 = $100,000 a year, before counting the chance of ruin on any single bet.Case study
Seen in the real world.
Redstone Trading is a fictional commodity firm whose desk was heavily down in the third quarter. In this illustrative scenario, one trader doubled his positions to recover the shortfall before the year-end bonus review.
The market moved against him again and the losses widened. The risk committee responded with daily loss limits, mandatory sign-off for larger trades, and a bonus structure that no longer rewarded recovering losses in a single quarter.
Within a year the desk's results became steadier, and the firm found that fewer large losses meant fewer surprises for its auditors and lenders. The trader involved moved to a role with stricter oversight, and the committee began to review bonus plans every year for hidden incentives to gamble.
Watch out
Common mistakes.
- Assuming risk seeking is always irrational. Planned, limited risk taking can be sensible when the upside is large.
- Ignoring the effect of losses on behaviour. People often become risk seeking after losing, which makes losses grow.
- Treating risk seeking and risk lover as identical. One describes behaviour and the other is a formal economic preference.
Questions
People also ask.
What triggers risk seeking behaviour?
Common triggers are a recent loss, a looming target, incentive pay and overconfidence.
How can a company limit it?
Position limits, independent approvals and bonus plans that do not reward large bets are typical controls.
Is risk seeking the opposite of risk averse?
Yes. A risk averse person avoids uncertainty, while a risk seeking person pursues it.
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