Risk aversion describes a preference for certainty where an individual accepts a guaranteed payment less than the average payoff of a risky option rather than risking total loss. This behavior defines how most people choose sure cash over a gamble with identical expected value.
Kenneth Arrow and John W. Pratt introduced specific measures including the coefficient of absolute risk aversion to handle utility functions defined only up to affine transformations. Their work allows economists to describe curvature at any wealth level using derivatives.
Cambridge University launched the Winton Professorship of the Public Understanding of Risk in 2007 to address societal concerns about danger perception. David Spiegelhalter described this role as outreach focusing on how the public perceives risk rather than traditional academic research.
A 2009 study by Christopoulos et al found that neural responses in the right inferior frontal gyrus link directly to risk aversion levels. Participants with higher risk premia showed stronger responses to safer options during experiments while neuromodulation altered choices based on increased or decreased activity.
Economists avoid models exhibiting increasing absolute risk aversion because they imply unrealistic behaviors where richer people take on more total risk. Most models assume decreasing absolute risk aversion aligns with empirical data showing investors decrease their portfolio proportion held in risky assets when wealth increases.