I’m not sure what you mean here by risk aversion. If it’s not loss aversion, and it’s not due to decreasing marginal value, what is left?
Would you rather have $5 than a 50% chance of getting $4 and a 50% chance of getting $7? That, to me, sounds like the kind of risk aversion you’re describing, but I can’t think of a reason to want that.
Would you rather have $5 than a 50% chance of getting $4 and a 50% chance of getting $7? That, to me, sounds like the kind of risk aversion you’re describing, but I can’t think of a reason to want that.
Let me give you an example. You are going to the theater to watch the first showing of a movie you really want to see. At the ticket booth you discover that you forgot your wallet and can’t pay the ticket cost of $5. A bystander offers to help you, but because he’s a professor of decision science he offers you a choice: a guaranteed $5, or a 50% chance of $4 and a 50% chance of $7. What do you pick?
That’s a great example, but it goes both ways. If the professor offered you a choice between guaranteed $4 and a 50% chance between $5 and $2, you’d be averse to certainty instead (and even pay some expected money for the privilege). Both kinds of scenarios should happen equally often, so it can’t explain why people are risk-averse overall.
Both kinds of scenarios should happen equally often
Not in real life, they don’t.
People planning future actions prefer the certainty of having the necessary resources on hand at the proper time. Crudely speaking, that’s what planning is. If the amount of resources that will be available is uncertain, people often prefer to create that certainty by getting enough resources so that the amount at the lower bound is sufficient—and that involves paying the price of getting more (in the expectation) than you need.
Because people do plan, the situation of “I’ll pick the sufficient and certain amount over a chance to lose and a chance to win” occurs much more often than “I certainly have insufficient resources, so a chance to win is better than no chance at all”.
From my point of view it’s not a bet—there is no uncertainty involved—I just get to collect $1.
Not loss aversion—risk aversion. And yes, in most situations most humans are risk averse. There are exceptions—e.g. lotteries and gambling in general.
I’m not sure what you mean here by risk aversion. If it’s not loss aversion, and it’s not due to decreasing marginal value, what is left?
Would you rather have $5 than a 50% chance of getting $4 and a 50% chance of getting $7? That, to me, sounds like the kind of risk aversion you’re describing, but I can’t think of a reason to want that.
Aversion to uncertainty :-)
Let me give you an example. You are going to the theater to watch the first showing of a movie you really want to see. At the ticket booth you discover that you forgot your wallet and can’t pay the ticket cost of $5. A bystander offers to help you, but because he’s a professor of decision science he offers you a choice: a guaranteed $5, or a 50% chance of $4 and a 50% chance of $7. What do you pick?
That’s a great example, but it goes both ways. If the professor offered you a choice between guaranteed $4 and a 50% chance between $5 and $2, you’d be averse to certainty instead (and even pay some expected money for the privilege). Both kinds of scenarios should happen equally often, so it can’t explain why people are risk-averse overall.
Not in real life, they don’t.
People planning future actions prefer the certainty of having the necessary resources on hand at the proper time. Crudely speaking, that’s what planning is. If the amount of resources that will be available is uncertain, people often prefer to create that certainty by getting enough resources so that the amount at the lower bound is sufficient—and that involves paying the price of getting more (in the expectation) than you need.
Because people do plan, the situation of “I’ll pick the sufficient and certain amount over a chance to lose and a chance to win” occurs much more often than “I certainly have insufficient resources, so a chance to win is better than no chance at all”.