What does the term 'risk-seeking' refer to in the context of behavioral finance?

The term 'risk-seeking' in the context of behavioral finance refers to an individual's preference to take on more risk, particularly in situations where they are experiencing losses. This behavior can be attributed to the psychological phenomenon known as “loss aversion,” where individuals feel the pain of losing more intensely than the pleasure of gaining. When faced with losses, some investors may increase their willingness to take risks in the hopes of recouping their losses, exhibiting what is often termed risk-seeking behavior.

This tendency can lead to poor decision-making, as individuals may ignore the fundamental risks associated with high-risk investments simply because they are motivated by the desire to recover losses. It reflects a departure from traditional utility theory predictions, where rational investors are expected to act more conservatively in the face of losses rather than seeking additional risk.

In contrast, other options do not accurately encapsulate the essence of ‘risk-seeking’ as defined in behavioral finance. For instance, taking on financial liabilities without consideration applies to reckless financial behavior but lacks the specific context of loss scenarios. Always opting for high-reward investments could suggest a general openness to risk but does not necessarily reflect the context of seeking risk during losses. Lastly, refusing to diversify investment portfolios pertains to a lack of