By Iacovos Iacovides, APC Sports
When psychologists and sociologists study deviant behaviour, they focus on socioeconomic backgrounds, conditioning, and environmental and structural factors. Economists, however, offer a different perspective: risk appetite. They argue that people commit crimes as rational beings weighing risk against gain, such as prison sentence versus loot. The rational response to risk is not necessarily to avoid it but to factor it into decision-making. Risk appetite refers to the amount of risk an individual or organization is willing to accept in pursuit of objectives. There are three basic categories of risk appetite: risk-averse, risk-neutral, and risk-seeking. Every individual, including athletes, has their own risk appetite.
Life is full of gambles, where nothing is guaranteed and every move, including investments, carries a degree of risk. When examining investment options, you need to first understand your risk appetite to narrow your focus and maximize efficiency and effect.
Risk-Averse Investor
A risk-averse investor prefers to preserve what they have instead of seeking big gains. These individuals opt for low-risk options for more stability. A low-risk investment guarantees a reasonable return, though modest, with a very low chance of losing initial capital. Risk-averse investors tend to place their bet on safe options with a more or less guaranteed outcome, such as industry giants like Facebook, Alphabet (Google), Walt Disney, Starbucks, and Apple.
Risk-Seeking Investor
In contrast, risk-seeking investors prioritize gain over preserving capital. They are more interested in making generous profits despite the higher risks involved. They understand risk but are willing to face higher levels if it comes with the promise of higher returns. For example, risk-seeking investors might invest in start-ups with significant risks but the potential for impressive profits if successful. These investors might have been early backers of companies like Revolut.
Risk-Neutral Investor
Finally, risk-neutral investors do not account for risk when making decisions. They focus solely on gain without considering the inevitable risk involved. These individuals are less rational compared to others. For example, if a risk-neutral investor is presented with two options – option A requiring $100,000 capital and offering $1,000 with 5% risk, and option B offering $5,000 with 40% risk – the individual will choose option B because the risk does not matter to them.
Regardless of your risk type, you are not doomed or destined to succeed. Professional athletes often have more funds at their disposal compared to the average person, although their window of opportunity is shorter due to the limited length of their careers. Athletes need basic financial literacy and an investment advisor to help avoid jeopardizing their wealth and financial well-being. Even risky options can lead to substantial wealth, but it’s about balancing what you can afford to “sacrifice” relative to the risk. For instance, if you are a millionaire and invest $10,000 in a risky venture, you’ll likely be fine. But if you place half your savings in risky investments, it can harm your financial strength if the investment fails.
An advisor can help you by presenting appropriate options tailored to your needs. How you choose your advisor matters, but that is a separate subject. Ultimately, you must understand your risk appetite, which will help you recognize your weaknesses and restrain yourself when necessary.
For more information about the concept of risk appetite in relation to athlete-investors please contact us at [email protected].