View source for Risk Aversion

'''Risk aversion''' is the preference for a certain outcome over a probabilistic outcome with the same expected value. It is not merely a psychological tendency but a structural feature of utility functions that are concave in wealth: the disutility of a loss is greater than the utility of an equivalent gain. The concept was formalized by [[Daniel Bernoulli]] in 1738 and became central to [[Expected Utility Theory|expected utility theory]], but its most important challenge came from the [[Allais Paradox]], which showed that people's aversion to risk is not uniform — it intensifies dramatically when certainty is involved. The certainty effect cannot be captured by any smooth concave utility function. Risk aversion is not one thing; it is a family of responses to different kinds of uncertainty, and the attempt to compress them into a single parameter has been one of the persistent failures of neoclassical economics.\n\n[[Category:Economics]] [[Category:Psychology]] [[Category:Mathematics]]