Thread on Risk versus Reward.

It is important to realise that any investment has inherent risk and can go down as well as up!

Only invest what you can afford to lose. Tolerance for Risk versus reward is a personal choice that only you can determine.

For someone who is not at all risk-averse my investments reveal I'm far more concerned about the RISK/REWARD Tradeoff than people who actually are risk-averse.

They focus on the risk part. I have a keen eye on both risk and reward and am then able to understand risk better.

What may be seen as riskier behaviour, may in fact turn out to be more informed behaviour.

If you take a risk, a risk-averse observer would see it as very risky, a risk not worth taking.

There's always an inherent risk. There is risk in action and risk in inaction. When we focus on the risk-aversion, we are only considering half the equation.

Higher risk demands higher reward(Jensen's inequality). First, you must determine if you're risk-averse, risk-neutral, or risk-happy. For risk-averse people, taking high risks can make them unhappy, and minimising risk would make them happy, psychologically speaking(not results).

Here's a test to determine which you are:

Choose A or B?

A. $70 paid now.
B. 70% chance to win $100 with 30% chance of 0%.

If you like 'A' you're risk-averse. Not bothered, then you are risk-neutral & if you like 'B' you're crazy rich/broke person.

"Expected value" of 'B' is 0.7*$100+0.3*$0=$70

You can determine your precise risk aversion using things like Utility Function and Arrow-Pratt Measure etc. It's all very interesting stuff!