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risk aversion

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A widespread characteristic of human preferences, first discussed in 1738 by the Swiss mathematician and physicist Daniel Bernoulli (1700–82), according to which most people tend to value gains involving risk (2) less than certain gains of equivalent monetary expectation. A typical example is a choice between a sure gain of 50 units (Swiss francs, dollars, pounds sterling, or any other units) and a gamble involving a 50 per cent probability of winning 100 units and a 50 per cent probability of winning nothing. The two prospects are of equivalent monetary expected value, but most people prefer the sure gain to the gamble, which they typically value equally to a sure gain of about 35 units. See also Allais paradox, certainty effect, Ellsberg paradox, framing effect, modified Ellsberg paradox, prospect theory, St Petersburg paradox. Compare risk seeking. risk-averse adj.

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