An agent, perhaps an individual or a firm, is said to be risk averse if the agent prefers a deterministic outcome equal to the expectation of a risky outcome over that risky outcome. Risk aversion seems to be a common characteristic; introspection suggests as much. More importantly, it gives qualitative explanation to economic behaviour in many instances where risk is present. If individuals and firms were not risk averse, insurance markets would not exist. Needless to say, there are activities which are inconsistent with agents being risk averse. Gambling is perhaps the best example of such an activity.
Arrow–Pratt theory of risk aversion Arrow–Pratt measure of absolute risk aversion Arrow–Pratt measure of relative risk aversion Certainty equivalent Concavity Dual utility Equity premium puzzle Expected utility theory Insurance markets Maxmin expected utility Multivariate risk Probability measures Random variables Rank-dependent expected utility Relative risk Representation of preferences Risk aversion Risk compensation Risk–return trade-off Schur concave functions State-dependent utility Stochastic dominance von Neumann–Morgenstern utility function Wald’s criterion
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