Key Takeaways. The prospect theory says that investors value gains and losses differently, placing more weight on perceived gains versus perceived losses. The prospect theory is part of behavioral economics, suggesting investors chose perceived gains because losses cause a greater emotional impact.

Regret avoidance (also known as regret aversion) is a theory used to explain the tendency of investors to refuse to admit that a poor investment decision was made.

Mental accounting, also known as “two-pocket” theory, is a behavioral bias that occurs when people put their money into separate categories, separating them into different mental accounts, based on, say, the source of the money, or the intent of the account.

Loss aversion is the tendency to prefer avoiding losses to acquiring equivalent gains. The principle is prominent in the domain of economics. In past behavioral economics studies, users participate up until the threat of loss equals any incurred gains.

Loss aversion refers to an asymmetry in saving behavior in response to increases and decreases in income, where income decreases have a greater effect than increases.

The term risk-averse describes the investor who chooses the preservation of capital over the potential for a higher-than-average return. Generally, the return on a low-risk investment will match, or slightly exceed, the level of inflation over time. A high-risk investment may gain or lose a bundle of money.

Definition: A risk averse investor is an investor who prefers lower returns with known risks rather than higher returns with unknown risks. Risk lover is a person who is willing to take more risks while investing in order to earn higher returns.

Controlling for age, sex, education, and income, greater risk aversion was associated with poorer decision making (Estimate = −1.03, SE = 0.35, p = 0.003). To clarify this effect, the average decision making score was reduced by about 0.3 unit when the coefficient of risk aversion increased by 1 standard deviation.

Much of the typical risk aversion related to smaller investments can be attributed to a combination of two well-documented behavioral biases. The first is loss aversion, a phenomenon in which people fear losses more than they value equivalent gains.

3. What is the difference between avoiding a risk and accepting a risk? Avoiding a risk is changing the project plan in advance so as to eliminate specific risks from occurring while accepting a risk means no preventive action is taken; contingency plans may be used if the risk materializes.

Cons

• Embarrassment: With any new risk, there is a possibility that you can do the task wrong.
• Injury: Depending on what type of risk you take, you can risk an injury.
• Dislike Your Experience: You tried it out, and you ended up not liking your experience at all.

10 Risks Happy People Take Every Day

• They risk the possibility of being hurt.
• They risk being real in front of others.
• They risk missing out on something new, so they can appreciate what they have.
• They risk helping others without expectations.
• They risk taking full responsibility for their own happiness.
• They risk the consequences of taking action.