Psychology of Risk

date Sep 13, 2007
authors Ari Kiev
reading time 6 mins
  • Book Title: The Psychology of Risk - Mastering Market Uncertainty
  • Author: Ari Kiev
  • Year written/published: 2002
  • My Comments: My first book in understanding what it takes to risks… and what are the common emotions associated with it. Risk analysis and the emotions attached to it are extremely important… couldn’t have found a better book on the workings of risk psychology. I need more books on similar topics to understand the psychology of risk a bit more!
  • Contents page:
  1. Essentials of Risk Taking
  2. The Problems of Risk
  3. Personalities of Risk
  4. Practise of Risk Taking
  • Some extracts:

when are we more willing to take risks?

Most traders are willing to accept risk in order to avoid a loss (eg. holding onto a losing position) and are more cautious when dealing with potential gains (eg. reluctant to add more to winning positions). In other words, a trader would be more willing to take a greater risk in an effort not to lose $500 than he would gain $500. Given this propensity, you might understand why a trader would stay in a losing position in hopes that the tide will turn. Known as Weber’s Law, this and many other principles of human behaviour highlight the importance of understanding the psychological under-pinnings of rick-taking.

risk taking…

Risk taking means the willingness to act outside the vicious circle of concept-dominated experiences without a guarantee of success or approval. It means being willing to live life as the risk it is and not in terms of the limiting notions of your own self-doubts.

To like at risk is to engage in activity spontaneously and naturally. The psychology of risk taking means being willing to commit yourself to living from a future vision without any certainty. It is a willingness to commit to our vision and create goals related to the vision, irrespective of the frightening inner voices that predict failure or ridicule. In the trading arena, it involved a willingness to commit to a specific financial objective and to focus in the present moment on the implementation of this strategy without obsessive concern with reaching the goal.

Risk taking does not mean exposing yourself to danger. It does mean acting beyond the vicious circle of what you already know – where past concepts colour perspective and experience. It does mean making decisions with incomplete information and before you have checked everything out with the experts. Risk taking means letting go of past habits and values that lock you into fixed ways of relating to the world, so as to trade with a new concept of what is possible.

Master trader is focused and he is always challenging himself to ask…

  1. What more do I need to know?
  2. What additional work can I do?
  3. What can I learn from my own emotional reactivity to the markets?
  4. How long should I hold the position?
  5. How fast should I get out?
  6. What kind of loss limit is tolerable?

defining risk…

  1. where did you get into the trade?
  2. where did you add?
  3. where did you get out, if you go out?
  4. was there anything about your trading style that was reflection in the way in which you traded that stock?
  5. Did you buy at the bottom and scale into it more as it moved upward? Or did you buy it at the bottom and get out fast as it was going up?
  6. Conversely, did you see it as opportunity to start shorting the stock prior to an anticipated inflection point, and did you get out after the inflection point as the stock was going down?
  7. What does your approach to the trade tell you about your general style of trading?

Master trader…

Mastery is the capacity to empty your mind of preconceptions about yourself and the market, to let go of your persona, your life principles, and other beliefs and limiting notions, so that you can more fully take risks in the here and now. Mastery is about telling the truth, about not being too egotistical about your success or too depressed about your losses.

… … Lennny who told me, “The master trader is listening to an aspect of events that others aren’t listening to. He is able to calculate the risk factor in terms of how many people are playing a particular story. This is an intangible skill. He has learned from trading the tape how a stock is moving. He can tell when there is positive money flow into a sector or changes in money flow and the impact this flow has on stocks. He can then question why the stock is moving and explore reasons for it in terms of events going on in the company. Then he integrates his theory with a view of the entire market and what is happening in other sectors.”

taking bigger risk requires these 4 elements…

  1. Creating an information edge so that you are ahead of the curve
  2. having a thesis that you can support with data
  3. Making an assessment of the source of the data
  4. Trading on the basis of this data against other data in the market place.

understanding the business model…

  • the nature of the business and the basic assumptions of the business
  • how the business intends to make money and finance growth
  • the competitive factors in the sector that make for a good or poor prognosis for growth and competitive power in the market place.

Coaching can be particularly useful in helping…

  • tap you hidden potential
  • stay on target
  • get past self-doubts
  • move into centre state
  • assume responsibility
  • stay committed to vision
  • give up control

other discussions…

  • the size of your portions
  • your profit and loss
  • how are you limiting yourself
  • what more you can do to improve
  • what’s missing from your trades?


The market is like a blank canvas on which you can create your vision. If you can take risks in the present moment without regard to your history and without regard to your limiting thoughts ab out how things are supposed to be, you can begin to trade successfully in line with that vision today…. …  Mastery can, in fact, be boiled down to 2 basic premises: 1)defining a goal and a strategy by which to reach that goal and 2)trading in terms of what is keeping you form the realisations of that goal. When you trade with the lens of your vision, you will see reality more clearly and will be able to take risks more consciously with definite intentions to produce specific results in a specific way.