When we consider an Individual as consumer, everyone expects maximum utility or
gain from his act but there will always be a certain choices in term of risk. The
consumption activity to risky choices whether in buying goods and services or diversification
of funds like investment, lottery, gambling, or gaining interest from giving credit,
one will have to study the risk factor of a consumer.
An Individual's attitude towards risk depends upon his preferences and expectations
from his economic activities. When he expects higher returns he faces higher risk
and less risk by his lowering his choices, but any activity from an individual depends
upon his attitudes at first and his choice to get highest value depends upon his
nature of risk taking itself. Here we can use certain personal concept like….
a. Risk Averse
b. Risk Loving.
c. Risk Neutral.
If we apply this analysis to utility to money, each rupee of money can get us more
profit and make risk analysis easy.
As we know probability is the ratio of favorable events to the total number of events.
Suppose when we toss a coin, head and tail possibility may be ½ =0.50
If, a coin is tossed a ‘head’ possibility is 0.4 and its not occurring is 0.6 then
probability of an event is 1=(0.4+0.6).Every individual will want make profit on
the basis of his expected utility of attitudes that may considered as gaming or
pay off activity in economics. Suppose with payoff activity by tossing a coin, if
a gambler gains 5000 a head and losses 5000 by tail, each possibility likely to
Expected value= 0.5(5000) + 0.5(-5000) but
If a fair game of getting zero by Ev= 5000-5000=0 but,
if any numbered probability distribution expected the value is more than one, we
Ev = p1(x1) + P2 (x2)…px(Xx)
Most of the financial activities of an individual depend upon their intention to
take risk on the basis of expected returns. If they want to earn money but choices
are uncertain and risk bearing or risk averse nature decides the outcome, then,
on the basis of individual or basic attitude we can understand his risk taking attitudes
Most activities of an investor to bet upon a risk or to play a game is because of
the need to earn more money, People choose risk sharing activities like insurance,
mutual fund investment and risk bearing activities such as gambling, share market
investment which gives them higher returns, to get expected satisfaction.!
Economics on the basis of utility analysis and probability makes different portfolio
assessments of individuals and there are measures to reduce risks for portfolio
holder like ‘Specific risk’ factors, like holding shares through ‘Risk-pooling’
and ‘Risk sharing’ by investing in stock market called ‘Market Risk’. to analyze
share market risk analysis on the basis of Indexes. Economist suggest it as coefficient
If market moves in the same direction as Beta=1, A high Beta movement shows Beta>1
and when market moves down Beta<1.
A share between 1 to 0 movement when market moves down and surges above 0 to 1 it
involves high volatile assessments. Because of high returns it can be considered
as ‘portfolio risk management. Anyone who wants to get earning from risk, wants
to reduce risks across the products called portfolio manager. Suppose any investor
is prepared to take risk on zero sum payoffs he can make small premium investment
in Mutual fund or an insurance activity such as insurance in death, theft, health,
He may earn by paying premium but a large number of investors want to manage their
portfolio management by diversification.
If he is investing in future market rather than banks. to cover the future risk,
every investor studies retail and wholesale market and make investment in future
date for specific return. One can also make investments in forward markets like
metal, silver, gold, sugar, coal and currency., Now a day there is growth in commodities
market like, sugar, food grains, tea, wheat also but, there are risk averse people
who spend money on insurance rather than share investment. However ‘complete knowledge’
about market is necessary in earning the expected value and actual value to enhance
trade and profit..
Rational expectations Rational expectation method is real time assessment and management
mechanism on which sure or internal consistence of market data that we analyze or
aggregate movements of stock prices goes right. This is also based on stochastic
or model based on averages in the market and with the prediction based on data we
verify relevant variables such as present, past and future value of optional profit
function or pricing movements taking into consideration of future value of economic
variables. based on many contemporary macroeconomic models like..
• Rational choice
• The game theory
• Investor, consumer/firms decision and predictions
• Cobb-Web agents
• Best guess of the future models//Rational expectation analysis.etc/
A single investor can minimize the risk by investing in mutual fund or stock market
diversification just like ‘not putting eggs in one basket’. By this we can expect
more, suppose if we invest 1000 Rs to a risky share, getting only 50 per cent chance
of gaining but in recession the return will be lower. Suppose if he invests this
1000 Rs in different shares his expected average return can be more. If this investment
gives him return of 50:50 on Rs.10 and Rs.2 during recession his Average(Expected)
Return shall be.
Er = 0.5(10) + 0.5(2) =6 in mean time,
but in boom time … Its variance (Er)2 = 0.5(10)2 + 0.5(2)2 =16
Thus, average expected value on diversification of risks can bring more return mathematically.
A single investor does not know about risk management, actually market conditions
are different as there may be positive or negative correlation between variables,
but diversified management of risk can give advantages of getting higher profit,
‘The Law of Large Numbers’ can estimate risk and to give a profit to investor. Using
coefficient beta and probability hence gives a chance to investor to study the movement
of stock market but it depends upon independent investor who makes quality assessment
of risk and uncertainty.
About the author:
The author is Guest Lecturer, Gov’t First Grade college, Basavan Bagewadi, MGVC
College Muddebihal-586212, Dist Vijyapur (Karnataka) M-9538781580 email@example.com