This question is designed to explain to client the difference between risk averse and loss averse.
It is very rare that the client does not choose (a) in question #1. We then uncover question #2 and ask client to make a choice between (a) and (b). It is very rare that the client does not choose (b). We use this opportunity to explain the difference between risk averse and loss averse. We tell the client that we understand their concern with risk. In question #1, client does not wish to take a risk in order to earn more money. However, in question#2, client would take a risk to avoid losing money. For example, in real life, inflation risk can eat into client’s wealth, which could mean loss of wealth to sustain client’s standard of living in the long term.
It is very rare that the client does not choose (a) in question #1. We then uncover question #2 and ask client to make a choice between (a) and (b). It is very rare that the client does not choose (b). We use this opportunity to explain the difference between risk averse and loss averse. We tell the client that we understand their concern with risk. In question #1, client does not wish to take a risk in order to earn more money. However, in question#2, client would take a risk to avoid losing money. For example, in real life, inflation risk can eat into client’s wealth, which could mean loss of wealth to sustain client’s standard of living in the long term.
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