Risk-aversion

micro

我的想法

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Reference

Risk aversion is the concept of how much an individual or organization dislikes risk, or the possibility of loss, when making decisions or taking actions. People generally prefer stable and predictable returns rather than high-risk, high-return choices. In economics, risk aversion refers to the tendency of people to choose a conservative option over a decision that involves uncertainty. For example, a risk-averse individual may choose a stable job rather than starting an unpredictable business venture. This concept is also important for investors. A risk-averse investor may choose to invest in lower-risk stocks or bonds rather than high-risk or speculative assets. Understanding one’s own level of risk aversion is important in investing to determine an appropriate investment strategy that balances risk and return. By ChatGPT

Measurement of risk-aversion

Jensen Inequality:

We could get:

If $u^{\prime \prime }(x)<0,\overline{u(x)}<u(\overline{x})$

… And so on.

And we could easily get to know that if $u^{\prime }(x)>0$, that guy could be risk loving(gambler’s psychology)

And, how to measure if there are 2 risk averse people?

There are basically 2 methods:

Arrow-Pratt measure of absolute risk aversion (ARA): $-\frac{u^{\prime \prime }(x)}{u^{\prime }(x)}$

Arrow-Pratt measure of relative risk aversion (RRA): $-\frac{x{u}^{\prime \prime }(x)}{u^{\prime }(x)}$