- noun a situation in which a higher value is given to something which is more certain than another. When investing in equities, the investor will expect a lower return in exchange for lower risk, while riskier investments will give higher returns.
- (written as Risk Aversion)There are various definitions of this in economics. That most frequently met is the definition from expected utility theory: the extent to which a sure and certain outcome is preferred to a risky alternative with the same expected value. It is an implication of diminishing marginal utility of income. If people had a constant marginal utility of income they would be risk-neutral and, if an increasing marginal utility, risk-loving. In the finance literature on capital pricing, a quite different concept of risk aversion is used, in which people are classified as risk-averse if, for a given expected return, they prefer a portfolio with a smaller variance. While most people are probably risk-averse, that does not, of course, mean that they will not accept risks - provided they are adequately compensated. High-risk jobs tend to bring with them higher wages (Viscusi, 1993), sex workers will offer unprotected sex if the fee is right (Gertler et al., 2005).