logo
How it worksResearch CommunitiesBenefitsAbout Us
Schedule Demo
Learn Before

  • Risk Aversion

Diminishing Marginal Utility of Income as a Cause of Risk Aversion

A significant factor explaining risk-averse behavior is the principle of diminishing marginal utility of income. A person with diminishing marginal utility might find a certain sum, such as $100, to be sufficient for their needs, and therefore does not perceive a potential gain to $200 as being worth twice as much. This valuation makes them prefer the guaranteed $100 over a risky gamble for $200 or nothing.

0

1

2 days ago

Contributors are:

Gemini AI
Gemini AI
🏆 2

Who are from:

Google
Google
🏆 2

References

Tags

Social Science

Empirical Science

Science

Economy

CORE Econ

Economics

Ch.2 User-centered design process - User Experience Design - Winter 23 @ UI Design in UI @ University of Michigan - Ann Arbor

UI Design in UI @ University of Michigan - Ann Arbor

User Experience Design - Winter 23 @ UI Design in UI @ University of Michigan - Ann Arbor

UI @ University of Michigan - Ann Arbor

User Experience Design @ UI Design in UI @ University of Michigan - Ann Arbor

University of Michigan - Ann Arbor

Introduction to Microeconomics Course

The Economy 2.0 Microeconomics @ CORE Econ

Related

  • Intrinsic and Empirical Variations in Risk Aversion

  • Diminishing Marginal Utility of Income as a Cause of Risk Aversion

  • Situational Influence on Risk Aversion

  • Hypothetical Health Insurance Market with Uniform Premiums and Hidden Risk

Learn After

  • Investment Decision Analysis

  • An individual is offered a choice between two options: Option A is a guaranteed payment of 1,000.OptionBisagamblewitha501,000. Option B is a gamble with a 50% chance of winning 2,000 and a 50% chance of winning 0.Theindividualchoosestheguaranteed0. The individual chooses the guaranteed 1,000. Which of the following statements provides the best economic explanation for this behavior?

  • True or False: An individual whose satisfaction from money increases at a constant rate for every additional dollar would be indifferent between receiving a guaranteed 500andtakingabetwitha50500 and taking a bet with a 50% chance of winning 1,000 and a 50% chance of winning $0.

  • Lottery Winner's Choice

  • Wealth and Risk-Taking Behavior

  • Match each type of risk-taking behavior with the corresponding description of how an individual values additional income.

  • An individual's satisfaction from wealth can be measured in 'utility units'. This individual experiences 100 units of utility from having 10,000and150unitsofutilityfromhaving10,000 and 150 units of utility from having 20,000. Assume having 0provides0unitsofutility.Ifthisindividualcurrentlyhas0 provides 0 units of utility. If this individual currently has 10,000, how will they react to a proposal that offers a 50% chance of winning an additional 10,000anda5010,000 and a 50% chance of losing their entire 10,000?

  • The Rationale for Buying Insurance

  • Public Policy and Economic Well-being

  • For an individual who is hesitant to accept a fair 50/50 bet to either win or lose 1,000,theperceivednegativeimpactontheirwell−beingfromlosingthe1,000, the perceived negative impact on their well-being from losing the 1,000 is ________ than the perceived positive impact from winning the same amount.