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The economic theory and much of the decision theory are based on the assumption that we are risk-averse creatures; in the sense that we are more sensitive to bad outcomes than the good ones and so decision-makers instead of maximizing an objective economic rewards, maximize the subjective values of those rewards (utility functions) which take into account this aversion.

I have been studying economic theory and this risk-aversion concept comes a lot. I am wondering philosophically or psychologically, what are the real causes that makes us so. Is this related to making rational choices? What if we are not risk-averse by default, we just don't know our preferences well and making decisions becomes so complex.

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    This seems like an evolutionary biology and/or cognitive science question, no?
    – Rex Kerr
    May 2, 2013 at 14:50
  • Reading suggestions: Kahneman, Decision Theory, Allais, Ellsberg, Revealed preference
    – user3164
    May 3, 2013 at 8:18
  • nice question, but I think you should make muchmore of your last sentence.
    – Mozibur Ullah
    May 5, 2013 at 4:56
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    Unfortunately, as posed this question is more of a psychology question than a philosophy one. In fact, I'm not certain how philosophy can provide an answer at all, other than "pre-encounter" risk-aversion as planned through armchair thinking. In such a case, the question is simply not grounded enough in existing philosophy or focused enough to allow specific answers (right now it's essentially a poll for that aspect of the question). The psychology/evolutionary biology answer to this question seems more what you are looking for, but it is much more complex than some answers have hinted it at.
    – stoicfury
    May 5, 2013 at 21:04
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    I've voted to re-open. I think its a good question, but not phrased 'philosophically'. That its an axiom in micro-economics to me suggests it requires justification, and that justification needs a dose of philosophy.
    – Mozibur Ullah
    May 7, 2013 at 6:23

3 Answers 3

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I think that this is actually a good question that could be made better by asking are humans risk averse.

Many human Beings gamble with their health - smoking and drugs.

Some people will knowingly and willingly go to certain death - suicide bombers.

Some people will knowingly and willingly seek out dangerous thrills - gambling, mountaineering and other extreme sports.

The 20th century documents in great detail - War and violence - these are not risk averse activities.

I don't know a great deal of economic theory - but my understanding is that risk is positively correlated with gain. The greater the risk the greater the possible gain. Behavioral economics critically examines the assumption that human beings are rational agents - on the face of it this does not seem to be true. It seems to be a generally assumed axiom for the fortuitous flow of nice economic results that follow rather than one upheld by critical observation. Human beings are far more often irrational than rational.

Rationality is a key concept for developing the idea of risk-aversion rigorously. After all to be risk averse one has to coolly weigh the risks involved in decisions.

The other concept that requires critical examination is the idea of perfect availability of information to all participants - just looking cursorily at any market shows that there are huge information asymmetries. These are two solid pillars of classical economics which upon examination really are quite risible. Its fairly obvious that once one begins to look at how classical economics is constructed that it has been carefully modelled on physics.

The rational agent - compare with the rational atom which collates all its collisions and then calculates the trajectory that it must embark on.

Perfect information - the perfect fluid or perfect gas of classical 19th century physics. With no viscosity and no friction. These assumptions are made to make the physics easy. If for example the atmosphere was a perfect gas we would have no weather. By analogy, one could suppose that building this assumption in classical economics one may have nice theorems but no actual - that is real economics.

There is an old adage in programming folklore - garbage in, garbage out. There is a converse that is appropriate here - perfection in, perfection out.

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  • nice metaphors.
    – omar
    May 7, 2013 at 5:31
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You are right in saying "we just don't know our preferences well and making decisions becomes so complex" moreover we do not know our power; what we can accomplish once we set our minds on it.

I always get surprised at how many high-school/college drop-outs (considering dropping out of school is taking a big risk) turn out to become billionaires and the risk-averse population (who had bright ideas in school but didn't have the courage to pursue them) end up working for these people for fixed incomes.

So as to WHY are we so risk-averse because we are too afraid to lose anything even if we don't have that thing yet.

What makes us so risk-averse?!? I'll let the following extract from Steve Chandler's book 100 ways to motivate yourself explain!

*If we realized exactly how much vulgar, pessimistic, and manipulative negativity was 
deliberately packed into every daily newspaper and most television shows and Hollywood 
movies, we would resist the temptation to flood our brains with their garbage.*
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Caveman 1: Hey, what's that sound?
Caveman 2: What, that rustling sound from the long grass? It's probably just the wind, come on, let's go hunter-gathering.
Caveman 1: Nah, I think I'm going to hang back here for a bit.
Caveman 2: Pfft, whatever, I'm going to come back with a nice fat proto-chicken to eat. Maybe even some eggs.
Caveman 2 wanders off into the long grass; a few seconds later a proto-lion jumps out and eats him. Caveman 1 wanders back home and contributes his risk-averse genes to the pool.

Just so.

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    Perhaps you could expand on this answer a bit. I see where you're going with this but it may not be readily apparent to others. Even if it is, I don't think apathy is a complete explanation as to why humans might be considered risk-averse...
    – stoicfury
    May 4, 2013 at 11:45
  • I would downvote this question, but it made me laugh too hard.
    – RandomDuck.NET
    May 5, 2013 at 0:22
  • @evilsoup - Excellently put!!! and a good username too :)
    – Farhan Ahmed
    May 5, 2013 at 13:33
  • alo.mit.edu/wp-content/uploads/2015/06/… This is a more rigorous account of what this answer suggests.
    – Kun
    Mar 4, 2016 at 19:32

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