What would a risk-seeking person's utility curve look like? What would a risk-averse person's utility curve look like?
OCW Scholar - Principles of Microeconomics
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I guess, how do they compare to someone who is risk neutral
Cool stuff, we have two functions for utility here: (1.) risk-seeking or risk-loving, and (2.) risk-averse. They are opposing concepts, so their functions will essentially be near inverses of each other.
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seems that you are willing to forgo opportunities to gain that have uncertain probabilities
heh, right, so risk-seeking is *willing
If you had a gamble: say 50/50 you could win $10..so with p=.5 you could win $10, and with p=.5 you could win $0. So the expected pay out is (.5)*10 + (.5) * 0 = $5. A risk averse person would rather take a certain smaller amount than the expected amount then engage in the gamble.
The expected utility of the gamble would be less than a value on that risk-averse person's utility curve (therefore within the area bound by the curve), and therefore of less utility. But for the risk-seeking person, it's the exact opposite situation. You'd almost have to pay the risk-lover to not take the gamble. Then the expected utility of the gamble would fall above the utility curve, and therefore of more greater utility
Risk averse, shows decreases increases in utility here
|dw:1330492155490:dw| Risk loving shows increasing increases in utility here
|dw:1330492198982:dw| Risk neutral is doesn't care!