Exposition of a New Theory on the Measurement of Risk¶
Bernoulli, D. (1738/1954). Exposition of a New Theory on the Measurement of Risk. Econometrica, 22(1), 23-36.
Cited by¶
2 citations across 2 artifacts.
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Primes¶
- Risk Aversion
- Risk aversion is the property of an agent's preferences (or, equivalently, their utility function) that causes them to prefer a sure outcome to an uncertain prospect with the same expected value — formally, the agent prefers the certain wealth E[W] to the random wealth W itself, for any non-degenerate gamble, corresponding to a concave utility function U(w) with U''(w) < 0
This sourceResolves the St. Petersburg paradox by proposing that agents value expected utility rather than expected monetary gain, with utility logarithmic in wealth — the founding statement of diminishing marginal utility and concave (risk-averse) utility.
- Risk aversion is the property of an agent's preferences (or, equivalently, their utility function) that causes them to prefer a sure outcome to an uncertain prospect with the same expected value — formally, the agent prefers the certain wealth E[W] to the random wealth W itself, for any non-degenerate gamble, corresponding to a concave utility function U(w) with U''(w) < 0
Mechanisms¶
- Expected Value Calculation
- Averaging a catastrophic, irreversible, or non-compensable outcome into an expected figure treats a 1% chance of disaster as interchangeable with a certain 1% loss; the St. Petersburg paradox is the classic demonstration that raw expected value, taken alone, can prescribe choices no sane actor would make.
This sourcePresents the St. Petersburg paradox in which ordinary expected-value calculation yields an unbounded valuation despite reasonable people accepting only a modest price for the gamble.
- Averaging a catastrophic, irreversible, or non-compensable outcome into an expected figure treats a 1% chance of disaster as interchangeable with a certain 1% loss; the St. Petersburg paradox is the classic demonstration that raw expected value, taken alone, can prescribe choices no sane actor would make.
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