Q–Q plot: Difference between revisions
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{{Unreferenced stub|auto=yes|date=December 2009}} | |||
In [[economics]] and [[finance]], a '''risk-seeker''' or '''risk-lover''' is a person who has a preference ''for'' [[risk]]. While most [[investment|investors]] are considered [[risk averse|risk ''averse'']], one could view casino-goers as risk-seeking. If offered either $50 or a 50% each chance of either $100 or nothing, a risk-seeking person would prefer the gamble even though the gamble and the sure thing have the same [[expected value]]. In fact, the risk lover would be indifferent to accepting a less than 50% chance of $100 versus the sure $50 (how much less would depend on how risk loving the person is). The risk lover would also be indifferent between a 50% chance of each of $X and nothing versus the sure $50, where $X is some amount less than $100 (again, how much less would depend on how risk loving the person is). | |||
Risk-seeking behavior can be observed in the negative domain <math>x<0</math> for [[prospect theory]] value functions, where the functions are convex for <math>x<0</math> but concave for <math>x>0</math>. | |||
==The risk-seeking utility function== | |||
Choice under uncertainty is often characterized as the maximization of [[expected utility]]. Utility is often assumed to be a function of profit or final portfolio wealth, with a positive first [[derivative]]. The utility function whose expected value is maximized is [[convex function|convex]] for a risk-seeker, [[concave function|concave]] for a risk-averse agent, and linear for a [[risk neutral|risk-neutral]] agent. Its convexity in the risk-seeking case has the effect of causing a [[mean-preserving spread]] of any [[probability distribution]] of wealth outcomes to be preferred over the unspread distribution. | |||
{{DEFAULTSORT:Risk-seeking}} | |||
[[Category:Business economics]] | |||
[[Category:Risk]] | |||
[[Category:Prospect theory]] | |||
[[Category:Financial risk]] | |||
[[Category:Economics of uncertainty]] | |||
[[Category:Utility]] | |||
[[Category:Personality]] | |||
{{Finance-stub}} | |||
Revision as of 02:38, 29 January 2014
Template:Unreferenced stub In economics and finance, a risk-seeker or risk-lover is a person who has a preference for risk. While most investors are considered risk averse, one could view casino-goers as risk-seeking. If offered either $50 or a 50% each chance of either $100 or nothing, a risk-seeking person would prefer the gamble even though the gamble and the sure thing have the same expected value. In fact, the risk lover would be indifferent to accepting a less than 50% chance of $100 versus the sure $50 (how much less would depend on how risk loving the person is). The risk lover would also be indifferent between a 50% chance of each of $X and nothing versus the sure $50, where $X is some amount less than $100 (again, how much less would depend on how risk loving the person is).
Risk-seeking behavior can be observed in the negative domain for prospect theory value functions, where the functions are convex for but concave for .
The risk-seeking utility function
Choice under uncertainty is often characterized as the maximization of expected utility. Utility is often assumed to be a function of profit or final portfolio wealth, with a positive first derivative. The utility function whose expected value is maximized is convex for a risk-seeker, concave for a risk-averse agent, and linear for a risk-neutral agent. Its convexity in the risk-seeking case has the effect of causing a mean-preserving spread of any probability distribution of wealth outcomes to be preferred over the unspread distribution.