Risk tolerance is often viewed as the core of risk preferences, which (along with time preferences and social preferences) are one of the cornerstones of preferences measured by behavioral economists (Falk et al., 2023). Risk tolerance shows how much uncertainty an individual is willing to accept to achieve a desired outcome, such as a potential monetary gain. For example, when offered an opportunity to buy a lottery ticket with equal chances of winning either $20 or $0, a risk-neutral person should be willing to pay up to $10, which is the ‘expected value’ of the lottery (50% of $20 + 50% of $0 = $10). Those willing to pay less than $10 would be classified as risk-averse, and those willing to pay more would be considered risk-seeking (Charness et al., 2013).
In economics, risk tolerance has traditionally been understood through expected utility theory, which has been criticized by behavioral approaches that consider risky outcomes relative to a reference point (see prospect theory), instead of focusing on final wealth. According to this perspective, individuals are usually more willing to take risks to avoid losses than to make gains due to loss aversion.
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References
Charness, G., Gneezy, U., & Imas, A. (2013). Experimental methods: Eliciting risk preferences. Journal of Economic Behavior & Organization, 87, 43-51.