Your Risk Preference
The purpose of this tool is to help you compute your personal risk preference. Some people are "risk loving," meaning they would pay money for the opportunity to take risks, and some people are "risk neutral," meaning they don't think about it at all. But most people are "risk averse", meaning that they would pay to avoid risks or be willing to make less money on an investment if risk were reduced.
Computing Your Personal Preference
We compute your risk preference in three different ways because it is very difficult to measure accurately. The first method is a quiz based on psychological research.* The second method is to estimate your risk preference through a series of questions. Suppose you have a business opportunity to grow onions. Onions are difficult to grow where you live and crops fail about half the time. it can still be profitable because onions can fetch a high price. Your profit will depend on whether you make a crop and the price of onions. At the highest price of onions, there is a 50% chance of earning $100 thousand dollars and 50% chance of having no crop to sell. You have $50 expected value. Risk Preference Calculator asks you how much you to slide the blue bar to the amount that you would be willing to pay to plant onions under these conditions. If you were willing to pay $45, you would be risk averse, since the EV is $50. If you would pay more than $50, your pre
ferences are risk-loving. If you would pay $50 your preferences are considered risk-neutral. Most people would pay something less than $50 to take this opportunity.
Comparing Your Score
Finally, the third tab lets you compare your risk preferences with people in industry that have similar size operations. Enter your net sales, net income or net equity to reveal the "risk tolerance" that a Harvard study found people with similar size businesses would have. These are averages based on many businesses. We then translate the risk tolerance score into a risk preference score that can be compared to the personal score you developed for yourself in the second method. What you are comparing is a score developed specifically for you (method 2) with the average score you would find for all businesses with similar sales, income and/or equity.
* Grable, J. E., and R. H. Lytton. 1999. Financial risk tolerance revisited: The development of a risk assessment instrumant. Financial Services Review, 8: p. 163 - 181.