Measures of Risk and Risk Aversion

Abstract

Whilst ideally decisions should be made on a basis of rational thinking and logic, many in practice are made for irrational, unexplainable reasons, particularly where information is incomplete, time is limited or when the outcomes of a decision lead to uncertainty whatever course of action is chosen. In such cases, there is a tendency to rely upon “hunches” or “feel” rather than to examine the consequences of the decision in detail. This article describes a structured approach to decision making that can be used even in “fuzzy” uncertain problems. It discusses the use of probability, decision trees and the utility curve, then describes two real cases where these techniques have helped a decision maker to select the most rational course of action.

Citation

Atherton, J. (1978), "Measures of Risk and Risk Aversion", Managerial Finance, Vol. 4 No. 3, pp. 252-268. https://doi.org/10.1108/eb013428