BUSF_A01.qxd

Attitudes to risk and expected value

Figure 6.6 shows the general shapes of the utility curves of (a) a risk-averse investor,

(b) a risk-lovinginvestor and (c) a risk-neutralinvestor. A risk-neutral investor views

equally entering a wager whose expected value is zero, and doing nothing.

Figure 6.6
Graphs of the
utility of wealth
against wealth for
three individuals
with different
attitudes towards
risk

The risk-averse individual (graph a) would gain less satisfaction from having an additional

£1 than the satisfaction that would be lost from having £1 less. The risk-loving individual

(graph b) would gain more satisfaction from having an additional £1 than would be lost from

having £1 less. To the risk-neutral individual (graph c), the gain in satisfaction from having

an additional £1 is equal to the loss in satisfaction of having £1 less.

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