risk averse

In economics, risk aversion describes an individual's preference for certainty over uncertainty. When faced with choices that have similar expected monetary values but different levels of variability, a risk-averse person will choose the option with less variability. This is because the disutility of a potential loss is greater than the utility of an equivalent potential gain.1

The von Neumann–Morgenstern utility function is a model that incorporates behavior toward risk variance. It suggests that individuals make decisions to maximize the expected utility derived from a choice, rather than just the monetary value. This framework can explain risk-averse, risk-neutral, and risk-loving behaviors, acknowledging that utility functions are subjective and can vary between individuals and firms.2