Question

Will a risk-averse person always prefer a sure thing over a gamble? Why or why not?...

  1. Will a risk-averse person always prefer a sure thing over a gamble? Why or why not?

  1. Will a risk-prone person always prefer a gamble over a sure thing? Why or why not?

Homework Answers

Answer #1

Risk aversion is a preference for a sure outcome over a gamble with higher or equal expected value . Conversely , rejection of a sure thing in favour of a gramble of lower or equal expect value. Risk averse people has a dimnishing marginal utility of income and prefer a certain income to a gamble with the same expected income . If people prefer lower certain cash flow to a similar expected payoff to avoid uncertainty. Then they are risk averse.

Risk aversion is the behaviour of humans, who, when, exposed to uncertainty , attempt to lower than uncertainty . It is the hesitation of a person to agree to a situation with an unknown pay off rather than another situation with a more predictable payoff but possibly lower expected pay off.

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