Risk Aversion

The traditional view of risk aversion is based on expected utility theory, which states that decision makers maximize the expected utility of outcomes. In some studies, expected utility theory has been argued to be an inadequate representation of decision-making under risk and uncertainty , and its ability to explain risk attitude has been challenged. The most valuable contribution to understanding risk aversion has been prospect theory, where gains and losses are perceived differently, and the overall utility is defined in terms of changes in values relative to a reference point.