Term of Art: Risk Aversion

“Risk aversion: 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 less that 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 percent probability of winning 100 units and a 50 percent 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.”

Excerpted from: Colman, Andrew M., ed. Oxford Dictionary of Psychology. New York: Oxford University Press, 2003.

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