Utility theory and mathematical analysis of risk attitude
Keywords:Risk, utility function, mathematical analysis, expected utility
In a world full of uncertainty, individuals have to make different choices. Based on their risk preferences, decision-making processes differ. Risk preference encounters an individual’s willingness to bear the risk. Usually, economists distinguish three types. Particularly they mention risk-averse, risk-seeking, and risk-neutral individuals. Risk-averse is the person who prefers a sure amount of cash over gambling on cash, while risk-seeking is the person who favors gambling on cash over a sure amount of cash, and risk-neutral is the person who is indifferent between sure amount and gambling. Even though it is not directly possible to observe an individual's risk preferences, the utility theory can be used to depict a choice for the risk level. The following paper aims to determine the individual’s risk preference from utility functions and provide mathematical analysis.
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