Risk-taking Factors in a Dynamic Approach

Abstract

The most common definition of risk is quantified by the probability of an adverse event occurring and the value of the adverse consequence. Theoretically, the decision to take a risk can also be based essentially on these two pieces of information. In addition, according to traditional risk-taking models, the perception of risk, the psychological characteristics of the decision-makers and their relevant experience are also important. In the case of mathematical-statistical-psychological models, little emphasis is placed on the fact that risk is in fact the inability to completely control the activity in question. The causes of this incompleteness are based on the shortcomings in the relevant capabilities of the economic agent. Economic agents have different capabilities, so they rarely face the same risks, even for almost identical activities. Just as the requirements and circumstances of the activity are constantly changing, so are the capabilities of the economic agent. Consequently, the size of the capability gap of an economic agent is also constantly changing. This should be taken into account in risk-taking decisions and their revision. The paper attempts to model this dynamic risk-taking mechanism and to show how different risk-taking strategies may be pursued by economic agents in certain baseline situations.