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Practical Risk Advice Based on Applied Economics

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You have a friend who is always getting into trouble by taking unwise risks. What advice, based on applied economics, would you give this person? Conversely, what advice would you give someone you believe to be excessively wary of risk? Also, assume you are an investor in the stock market. What would be your position in that market now?

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Solution Summary

Pitfalls of risk aversion and risk seeking behavior

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In economics, risk is seen as a part of decision-making. People will undertake a project as long as the possible loss is at least as great as the potential reward of an undertaking. The greater the possibility of loss, the greater the risk of the undertaking. When part of a rational decision-making process, it helps to maximize utility. People lose utility when they are either too cautious or not cautious enough.

For someone who is always taking unwise risks, it would be worthwhile to review some of his past mistakes. While in real life we rarely have exact numbers to guide our decisions, you can ...

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