Risk attitude
A decision maker’s risk attitude characterizes his willingness to engage in risky prospects.
Focusing on risky prospects with monetary outcomes, a decision maker displays
risk aversion
if and only if he strictly prefers a certain consequence to any risky prospect whose
mathematical expectation of consequences equals that certain amount.
Equivalently, a decision maker is said to be risk averse if and only if he
strictly refuses to participate in fair games (i.e. games with an
expected net outcome of zero). He is said to be a risk preferrer
if and only if he strictly prefers
the above mentioned risky prospect to its certain consequence.
He displays risk neutrality if and only if he is indifferent
between the risky prospect and the certain consequence.
Let u(x) denote a decision maker’s utility function on amounts of money.
Risk aversion, risk neutrality, and risk preference correspond to the
strict concavity, linearity, and strict convexity of u(x), respectively.
See also:
preferences,
risk,
risk aversion,
utility
Literature:
Hirshleifer & Riley (1992),
Mas-Colell, Whinston & Green (1995),
Sharpe & Bailey (1995)
