Yesterday, I discussed how both laypeople and finance professionals assess the riskiness of an investment the same way. More importantly, changing the volatility of an investment did not materially change the perception of risk. What did influence the perception of risk was the skewness of an investment. Investments with positive skewness, i.e. payoffs like a lottery with many small losses and potentially large gains, are perceived as less risky than investment with negative skewness.
Risk is path dependent
Risk is path dependent
Risk is path dependent
Yesterday, I discussed how both laypeople and finance professionals assess the riskiness of an investment the same way. More importantly, changing the volatility of an investment did not materially change the perception of risk. What did influence the perception of risk was the skewness of an investment. Investments with positive skewness, i.e. payoffs like a lottery with many small losses and potentially large gains, are perceived as less risky than investment with negative skewness.