Which type of risk is based on an individual's mental condition or state of mind?

Subjective risk refers to the perception of risk based on an individual's personal beliefs, feelings, or mental state. This type of risk can vary significantly from person to person because it is influenced by personal experiences, emotions, and level of awareness. For instance, one person may feel that a particular investment carries a high degree of risk due to their past experiences, while another individual may feel confident and perceive the same investment as low risk.

In essence, subjective risk highlights how personal interpretation and psychological factors can lead to differing assessments of risk levels, even when external circumstances are the same. As a result, understanding subjective risk is crucial in insurance and risk management, as it can affect decision-making and behaviors related to risk.

Other types of risk, such as objective risk or statistical risk, involve more quantifiable measures and are not influenced by personal feelings or mental states, making them fundamentally different from subjective risk.