What it means
Most people in finance are assumed to be risk averse, meaning they want extra reward for taking on extra risk. A risk lover is the reverse: the uncertainty itself has appeal, so the possibility of a large payoff matters more than the chance of a loss.
Economists describe this with a utility curve (a measure of satisfaction) that bends upwards. The textbook test is a simple coin-flip.
Offer someone a guaranteed $50,000 or a 50% chance of $100,000 and a 50% chance of nothing, both worth $50,000 on average. The risk lover picks the gamble, the risk neutral person shrugs, and the risk averse person takes the sure thing.
In business, risk-loving behaviour shows up in venture investing, speculative trading and founders who stake everything on one product. Some of this is rational, because a few huge winners can pay for many failures.
Some of it is a bias, such as chasing lottery-like returns or doubling down after losses. Risk attitudes matter for pricing and contracts.
If everyone were a risk lover, risky assets would be bid up and offer lower expected returns than safe ones, which is the opposite of what we normally see in markets. This is one reason economists treat risk lovers as the exception, not the rule.
A nuance is that people are rarely risk lovers in everything. Someone may buy lottery tickets and still insure their house, so risk attitude can change with the amount at stake and the situation.
Economists also use the idea to separate risk attitude from simple greed. Everyone prefers more money to less, but only a risk lover prefers the uncertain route to the same money.
This distinction helps explain why people buy both insurance and lottery tickets, and why a single label rarely fits one person.
In practice
Real-world examples.
Example
A seed investor backs ten start-ups knowing that nine will probably fail. She accepts a poor chance of success on each because one winner could return the whole fund.
Example
A casino visitor chooses a bet with a negative expected return over a smaller guaranteed payment. The excitement of a possible large win is part of what he is buying.
Example
A sales director takes a commission-only role with unlimited upside rather than a modest salary. He values the chance of a very high year more than the security of a steady wage.
Formula
Calculation
A risk lover's utility is convex, which means that utility rises faster than wealth. A simple example is:
Utility = Wealth squared
Expected utility of a gamble = (probability of outcome 1 x utility of outcome 1) + (probability of outcome 2 x utility of outcome 2)
Worked example, with wealth measured in thousands of dollars: The choice is a guaranteed $50,000 versus a gamble with a 50% chance of $100,000 and a 50% chance of $0.
Utility of the sure $50,000 = 50 x 50 = 2,500
Expected utility of the gamble = (0.5 x 100 x 100) + (0.5 x 0 x 0) = 5,000 + 0 = 5,000
Since 5,000 is higher than 2,500, the risk lover chooses the gamble. Even a guaranteed $60,000 gives only 60 x 60 = 3,600, still below 5,000, so the risk lover would turn that down too.
In plain English, the squared utility curve rewards big wins disproportionately. A $100,000 win is worth four times as much utility as a $50,000 win (10,000 versus 2,500), not just twice as much, which is exactly why the gamble feels more attractive to this person.Case study
Seen in the real world.
Sunpeak Ventures is a fictional investment club whose members all described themselves as risk lovers. In this illustrative story, the club put 80% of its savings into three speculative mining shares because each had a small chance of a tenfold return.
Two of the three shares fell to almost nothing, and the club lost most of its capital. The treasurer then introduced a rule that no single position could exceed 10% of the fund, which kept the chance of occasional big wins while avoiding a wipe-out.
After the loss, the club kept a small speculative allowance of 5% of its funds for members who wanted lottery-style bets. The remaining 95% went into diversified funds, which gave the risk lovers their excitement while protecting the capital that members depended on.
Watch out
Common mistakes.
- Confusing a risk lover with a risk neutral person. A risk neutral person ignores risk, while a risk lover actively prefers it.
- Assuming risk lovers never lose money. Their choices have lower or equal expected returns, so over time they often do worse.
- Labelling anyone who invests in shares as a risk lover. Most investors accept risk only because they expect to be paid for it.
Questions
People also ask.
Is being a risk lover good or bad?
Neither on its own. It depends on whether the person can afford to lose what is at stake.
How is a risk lover shown on a utility chart?
The curve bends upward and gets steeper as wealth rises, which is called a convex curve.
Do risk lovers exist in real markets?
Yes, though they are thought to be a minority. Their behaviour is sometimes used to explain lottery sales and speculative bubbles.
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