risk+lover


 * __Risk Lover__**

A person who is a risk lover prefers a risky plan that will lead to an expected amount of money to a safer plan that will lead to a certain amount of money. A true risk lover may choose a the more foolish of two options because a risk lover derives enjoyment from the actual act of taking a risk. A risk lover is likely to prefer mountain climbing to walking in a park. To a risk lover, the potential activities themselves in some situations are less relevant than the risk associated with each one.

According to Samuel A. Baker at the University of South Carolina, a television game show is a great example that can help determine a person’s risk profile. For example, let’s say that a contestant on a game show wins $10,000 and is given the option of walking away with the money or playing again knowing there is a 50% chance of winning $10,000 more.

A person who plays again prefers risk. This person may be a risk lover, but that cannot be determined with the information given. A game that provided a lesser chance of winning an additional $10,000 would need to be explored to determine if this person is truly a risk lover.

__**References**__

Baye, Micheal R. __Managerial Economics and Business Strategy__. 2006, pp. 438 Samuel A. Baker, copyright 1999-2001 http://hspm.sph.sc.edu/COURSES/ECON/RiskA/RiskA.html

__**Sample Test Questions**__

What will a risk lover do when presented with the opportunity to purchase 500 shares of an established and stable energy company or to purchase 500 shares of a new ethanol company that could potentially grow at an exponential rate over the next several years?

a. Purchase the shares of the energy company knowing the stock price will rise gradually. b. Purchase the shares of the ethanol company in the hope that the share price goes up dramatically over the next few years.

A risk lover will most likely purchase stock in the ethanol company. There is a higher risk with the ethanol company that the price of the stock will go down, but to the risk lover, this is outweighed by the possibility that the ethanol company’s stock price will rise more quickly than the stock price of the energy company.

The manager of a baseball team is a true risk lover. What choice below best demonstrates what this manager will choose to do when runners reach first base.

a. Never bunt regardless of the count on the batter or the number of outs in an inning b. Give the steal sign when the speedy leadoff batter reaches first base in the first inning c. Order the slow-footed catcher to steal when he reaches first base d. All of the above

The answer is d, All of the above. A true risk-loving manager will tell the catcher to try to steal second base just the same way that he will tell the leadoff batter to try to steal. This manager won't be patient enough to try to bunt a runner to second, when the risky thrill of an attempted stolen base is an option.

Which of these games would a risk lover prefer the most?

a. Flipping a coin and winning a quarter for a heads or losing a quarter for a tails b. Flipping a coin and winning a dollar for a heads or losing a dollor for a tails

The answer is b. The true risk lover enjoys the riskier game. Each of these games gives the risk lover a 50/50 chance of winning, but the second game provides more risk.

A Ball State student goes to a basketball game and is lucky enough to have his name drawn for one free shot at halftime. The student can choose to shoot a layup to win $100, a free throw to win $500, or a half court shot to win one semester's tuition. What will a risk lover choose?

a. The layup b. The half court shot c. The free throw

The correct answer is b. A risk lover enjoys the challenge and risk that comes with the half court shot. This person knows that the chances of making it are significantly lower than the chances of making the layup or the free throw, but the potential payoff far outweighs the risk for a true risk lover.