3 ms·

Distinguishing between risk-averse/neutral/preferring seems like begging the question to me. Couldn't there be an objective answer to which of three behaviors i

• Scaevolus 15y ago
  Rational towards what end? Maximizing expected gain and minimizing variance are both reasonable metrics.
  • colanderman 15y ago
    Right but which metric is reasonable can (and I believe should) change with scale. I'm risk-preferring when it comes to small amounts -- opportunities to make such decisions come up all the time, so I'll be likely to realize the mean. But I'm risk-averse when it comes to large amounts -- I may only get to make one such decision in my life. Better to minimize the variance here. This not only explains why people play lottery and buy insurance (playing the lottery non-compulsively involves risking only small amounts of money; not having insurance involves risking large amounts of money), but it also explains why those close to retirement should have risk-averse portfolios, while the young should have risk-preferring portfolios (those close to retirement have few "samples" left to take as it were).
• andylei 15y ago
  the term "rational" for economists has a very specific meaning. an actor behaving "rationally" has a utility function that satisfies some set of properties, and when confronted with choices, chooses in a way that maximizes that utility function. these are the properties of a "rational" utility function: http://en.wikipedia.org/wiki/Rational_choice_theory#Actions.2C_assumptions.2C_and_individual_preferences http://en.wikipedia.org/wiki/Rational_choice_theory#Actions....