How does investors’ risk appetite work in different conditions?

In my opinion risk appetite of the person remains same but his risk perception changes with the time, when market is at boom he anticipates less risk even though the actual risk is higher , risk perception depends on market sentiments in bearish market, risk perception of same investor changes even for same companies he considered good in bull market. when investor consider that risk is high he expects higher returns which may not be available in bearish market therefore he dump the security and prices fall this is due the reason that his risk appetite not changed but risk perception changed.

There are matters such as the type of investor and type of investment that needs clarity.  If it is stock market investments then we need to look at two types.  Those who are aware in the stock market and those who follow others.  In the first category, there are those who are experts in certain fields.  They can afford to take risk in their area of expertise and on others, their risk appetite falls.  In the second category, the advisor's preference is the criteria.  I am not saying that these investors in the second category depend on the advisor completely.  Even if they lack knowledge, they dont show.  They want to believe that they are experts too.  But the fact remains that the advisor's advise gets verified with two or three sources and then it is taken up.

We come to the conclusion that it is knowledge that determines risk apetite.  Where knowledge exists, calculated risks are taken. 

I shall deal with other types of investments in a different forum.

Dear Deepa,

I agree to Esha that the investors appetite is depent on the market conditions and the sentiments in the market. To understand and analyse the appetite one must categorise the investors, which is broadly- Retail & Institutional. The retail generallyt tends to go with the market sentiments, one has seen  even at the 18-20 k levels in the markets the retail was heavily investing with positive sentiments of markets going to 22-25 k. Reliance Power is the best example to understand the appetite of the investors in India.

I believe the indian investors are not much informed and they still invest on the advice of friend, relative and markets news.

One can find various psychologies of investors, few are only investing in Fixed Deposits, KVP's, post office, ect. i.e the traditional methods of investing.

Few are out and out equity investors, who invest directly into the markets. Few who are educated have opted for Mutual Funds and other morder methods.

I have been trying to study the pattern of these retail investors, but in India these are so Hetrogenous that everytime one comes to a conclution, he will be proved wrong...

According to me the simple fact is that investor's risk appetite is pro-cyclical.Which means that when economy upswing the risk appetite is increases so that the end of economic upswing it is extremely strong.Conversely , when the economy is slowdown/recession risk appetite falls.

I hope I had answer your question.