In the decision theory risk aversion designates the characteristic of a Entscheiders that this prefers the alternative with the smallest risk with the choice between several alternatives with same expectancy value concerning result.

That means in particular that the investor for risky investments of funds demands a risk premium and/or that its safety equivalent than the expected disbursement is smaller.

A risk aversion is a safe reference to a concave use function of the investor.

Formal definition

A Entscheider with a use function u is called risikoavers, if to any disbursement at an uncertain value of X applies:

E (u (X)) \ le u (E (X)).

Other manifestations of the risk attitude are:

1. E (u (X)) = u (E (X)) (risk-neutrally),
2. E (u (X)) \ ge u (E (X)) (risk-loving).

The degree of the risk aversion can be measured with the Arrow/Pratt measure; in the case of a risk aversion the measure is positive.

Example

A Entscheider and/or an investor has the possibility of participating in a Lotterie which disburses with a probability of 50% 200 euro and with a probability of 50% 0 euro. Although the expected disbursement 100 euro are (=0,5*200+0,5*0), are the investor only ready to pay an amount which is smaller, in order for the received risk to be compensated. This anticipated payment is the risk premium.

Practical meaning

In the decision theory one assumes frequently investors under normal circumstances are risikoavers and demand for received risk an appropriate risk premium.

Thus demands the Capital ate Pricing Model (CAPM) explicitly a positive risk premium for the Marktportfolio. Also in arbitrage the Pricing Model (APM) one usually proceeds from positive premiums for the risk.

See also: Risk neutrality, risk joy, expectation use

Articles in category "Risk aversion"

We found here 9 articles.

Related Websites

We found here 5 related websites.

• Creating Passionate Users: Death by risk-aversion
  Listed below are links to weblogs that reference Death by risk-aversion: ... Creating Passionate Users Risk aversion can take a good idea and make it ...


• Risk aversion - Wikipedia, the free encyclopedia
  Risk aversion is the reluctance of a person to accept a bargain with an ... As for absolute risk aversion, the corresponding terms constant relative risk ...


• Risk aversion - Wikipedia, the free encyclopedia
  Constant absolute risk aversion (CARA) if ru(c) is constant with respect to c ... As for absolute risk aversion, the corresponding terms constant relative ...


• Risk Aversion, Risk Neutrality, Risk Seeking
  Between risk aversion and risk seeking is a state called risk neutrality. An investor is risk neutral if he is indifferent to risk. ...


• Theory of Risk Aversion
  How does one measure the "degree" of risk aversion of an agent ... As we can see, the Arrow-Pratt measure of absolute risk aversion cannot capture a ...