Risk aversion

For the related psychological concept, see Risk aversion (psychology).
"Risk attitude" redirects here. For the concept in security studies and risk management, see Risk attitude (security).
Risk aversion (red) contrasted to risk neutrality (yellow) and risk loving (orange) in different settings. Left graph: A risk averse utility function is concave (from below), while a risk loving utility function is convex. Middle graph: In standard deviation-expected value space, risk averse indifference curves are upward sloped. Right graph: With fixed probabilities of two alternative states 1 and 2, risk averse indifference curves over pairs of state-contingent outcomes are convex.

In economics and finance, risk aversion is the tendency of people to prefer outcomes with low uncertainty to those outcomes with high uncertainty, even if the average outcome of the latter is equal to or higher in monetary value than the more certain outcome.[1]

Risk aversion explains the inclination to agree to a situation with a lower average payoff that is more predictable rather than another situation with a less predictable payoff that is higher on average. For example, a risk-averse investor might choose to put their money into a bank account with a low but guaranteed interest rate, rather than into a stock that may have high expected returns, but also involves a chance of losing value.

  1. ^ Werner, Jan (2008). "Risk Aversion". The New Palgrave Dictionary of Economics. pp. 1–6. doi:10.1057/978-1-349-95121-5_2741-1. ISBN 978-1-349-95121-5.