Risk Aversion - R isk Aversion There are th ree types of...

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Risk Aversion There are three types of people with regard to risk: risk averse risk mutual risk loving It’s all related to choice, with regard to the size of the Standard Deviation. Most people are risk adverse, so there is no need to consider the other two types. Risk adverse means that most people AVOID risk instead of approaching risks We only know how being risk averse affects decisions when the EXPECTED VALUE of the options are EQUAL Example: Option 1 – E(x)=20 – STD Dev. =5 Option 2 – E(x) =20 – STD Dev. = 1 A risk averse person would pick option 2, because the deviation is less. This means that there is less variation over what he may get. (Whether it be higher or lower)
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