risk neutral

In economics, "risk" refers to the uncertainty of financial outcomes, such as the possibility of a borrower defaulting on a loan or an investment not yielding the expected return. While individuals often seek to minimize risk (risk aversion), the economy as a whole encourages risk-taking for innovation and growth.1

The concept of risk is further explored through utility theory, particularly the von Neumann-Morgenstern utility function. This framework explains how individuals make decisions when faced with uncertain outcomes. It suggests that people aim to maximize their "expected utility," which is the satisfaction derived from a choice, weighted by its probability.23

A risk-neutral individual or firm values a guaranteed payoff equally to a probabilistic payoff with the same expected monetary value. For instance, they would be indifferent between receiving $21 for sure or having a 50% chance of $20 and a 50% chance of $22, as both have an expected value of $21.2