Risk aversion
A risk-averse decision maker requires compensation to accept uncertainty rather than receiving the same expected amount with certainty. The strength of the preference depends on the decision maker's circumstances and the losses and gains involved. Expected value alone may not represent the chosen outcome; utility, downside exposure, risk capacity and alternatives can matter. Risk aversion is not the same as avoiding every risky investment or refusing a project with a positive expected return. Corporate and individual objectives should be analysed in their own context.
Worked example
An investor chooses a certain $100 over a 50% chance of $200 and a 50% chance of nothing, even though each has expected value $100. The investor's preference illustrates aversion to that uncertainty, before any transaction costs.
Common mistake
Assuming a risk-averse person will never accept risk, or equating expected return with a guaranteed actual return.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Supporting | September 2026–June 2027 |
| ACCA | FM | Supporting | September 2026–June 2027 |