Editing Risk aversion (section)

==Example==
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| caption1  = Utility function of a risk-averse (risk-avoiding) individual

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| caption2  = Utility function of a risk-neutral individual

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| caption3  = Utility function of a risk-loving (risk-seeking) individual

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| footer            = '''CE''' – [[Certainty equivalent]]; '''E(U(W))''' – [[Expected value]] of the utility (expected utility) of the uncertain payment '''W'''; '''E(W)''' – Expected value of the uncertain payment; '''U(CE)''' – [[Utility]] of the certainty equivalent; '''U(E(W))''' – Utility of the expected value of the uncertain payment; '''U(W<sub>0</sub>)''' – Utility of the minimal payment; '''U(W<sub>1</sub>)''' – Utility of the maximal payment; '''W<sub>0</sub>''' – Minimal payment; '''W<sub>1</sub>''' – Maximal payment; '''RP''' – [[Risk premium]]
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A person is given the choice between two scenarios: one with a guaranteed payoff, and one with a risky payoff with same average value. In the former scenario, the person receives $50. In the uncertain scenario, a coin is flipped to decide whether the person receives $100 or nothing. The expected payoff for both scenarios is $50, meaning that an individual who was insensitive to risk would not care whether they took the guaranteed payment or the gamble. However, individuals may have different '''risk attitudes'''.<ref>{{cite book|author1=Mr Lev Virine|author2=Mr Michael Trumper|title=ProjectThink: Why Good Managers Make Poor Project Choices|url=https://books.google.com/books?id=-NCjAgAAQBAJ|date=28 October 2013|publisher=Gower Publishing, Ltd.|isbn=978-1-4724-0403-9}}</ref><ref>{{cite book|author1=David Hillson|author2=Ruth Murray-Webster|title=Understanding and Managing Risk Attitude|url=https://books.google.com/books?id=VeMdki1LYEUC|year=2007|publisher=Gower Publishing, Ltd.|isbn=978-0-566-08798-1}}</ref><ref>{{cite journal |last1=Adhikari |first1=Binay Kumar |last2=Agrawal |first2=Anup |title=Does local religiosity matter for bank risk-taking? |journal=Journal of Corporate Finance |date=June 2016 |volume=38 |pages=272–293 |doi=10.1016/j.jcorpfin.2016.01.009 }}</ref>

A person is said to be:

* '''risk averse''' (or '''risk avoiding''') - if they would accept a certain payment ([[certainty equivalent]]) of less than $50 (for example, $40), rather than taking the gamble and possibly receiving nothing.
* '''[[risk neutral]]''' – if they are indifferent between the bet and a certain $50 payment.
* '''[[risk loving]]''' (or '''risk seeking''') – if they would accept the bet even when the guaranteed payment is more than $50 (for example, $60).

The average payoff of the gamble, known as its [[expected value]], is $50. The smallest guaranteed dollar amount that an individual would be indifferent to compared to an uncertain gain of a specific average predicted value is called the [[certainty equivalent]], which is also used as a measure of risk aversion. An individual that is risk averse has a certainty equivalent that is smaller than the prediction of uncertain gains. The [[risk premium]] is the difference between the expected value and the certainty equivalent. For risk-averse individuals, risk premium is positive, for risk-neutral persons it is zero, and for risk-loving individuals their risk premium is negative.