Idea in
economics and
management science that
rational agents in an
economy act in their own interest with respect to risk. The definition of
a risk averse state is that the entitity will reject a bet whose probable
outcome is a loss. For example I would not bet more than a
dollar on a
chance to win a dollar or less based on the toss of a (
fair) coin. A
risk prone state is defined as one where the agent will take that bet. In
theory a risk-neutral agent is one who will take any bet with
odds and
stakes even (e.g. betting 10 cents on a 1/10th chance at winning a dollar).
In practice most people and organizations risk behavior is subject to a
Risk averse utility function (rauf). This is the observation that most
individuals and organizations become more risk averse as the stakes get
larger.