## AntiMatter 3 years ago What would a risk-seeking person's utility curve look like? What would a risk-averse person's utility curve look like?

1. AntiMatter

I guess, how do they compare to someone who is risk neutral

2. dpflan

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.

3. dpflan

What happens when you're risk-averse?

4. AntiMatter

seems that you are willing to forgo opportunities to gain that have uncertain probabilities

5. AntiMatter

sorry, *unwilling

6. dpflan

heh, right, so risk-seeking is *willing

7. dpflan

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.

8. dpflan

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

9. dpflan

|dw:1330492055083:dw|

10. dpflan

Risk averse, shows decreases increases in utility here

11. dpflan

|dw:1330492155490:dw| Risk loving shows increasing increases in utility here

12. dpflan

|dw:1330492198982:dw| Risk neutral is doesn't care!