In contrast, it may be more helpful to think of risk as increasing during upswings, as financial imbalances build up, and materialising in recessions. The length of the horizon here is crucial. I will return to this point in a moment. As regards behavioural responses, incentive structures in financial markets can compound the problems arising from difficulties in measuring risk.
Diversified shareholders with comparatively short investment horizons can demand overly ambitious returns. Competitive pressures encourage risk taking. The typical features of contracts and remuneration schedules for traders and money managers can have a similar effect.