# Risk attitude

The three types of risk attitudes in three different diagrams: risk neutrality (yellow), risk aversion (red), risk appetite (orange).

Under risk attitude (or risk preference ; english risk attitude ) is understood in economics the subjective willingness of a decision maker in choosing an action alternative uncertain event options to be accepted.

## General

The decision-makers of economic subjects ( private households , companies or the state and its subdivisions) are confronted with certain risks in their decisions . When making a decision under risk , the decision maker knows the probabilities of the occurrence of the possible environmental conditions ; when making a decision under uncertainty , the possible environmental conditions and the results of choosing a certain alternative and occurrence of a certain environmental condition are known, in which, however, the probability of occurrence of the environmental conditions is unknown .

In some cases, there is considerable overlap between these terms and their synonyms. In particular, risk appetite can already stand for behavior that tends to take risks or, in general, as a generic term for a risk tendency that is more or less pronounced or not at all. This aspect can also tip over if a continuum from risk appetite to risk aversion is considered.

## species

Depending on the willingness of the decision maker to assume a particular risk, three types are distinguished:

• Risk neutrality (also risk indifference ) is the behavior of a decision maker that is based exclusively on the (mathematical) expected value .
• Risk aversion (also risk aversion ) is the characteristic of a market participant to always choose the alternatives with the lower risk when choosing between several alternatives with the same expected value. He avoids danger or loss .
• Risk appetite (also risk affinity ): With the same expected value, more risk leads to more benefit for the decision maker.

We speak of a risk-averse attitude if the decision maker assesses the risk negatively; accordingly, the decision maker is willing to take risks if he evaluates the risk positively. Occasionally, a more stringent distinction is made between risk attitudes and actual risk behavior .

## economic aspects

The attitude towards risk plays a major role in decisions of all kinds. The risk-neutral decision maker will choose the alternative with which he achieves the maximum present value of the expected values ​​of the surplus payments . It only evaluates the expected value, so that the risk does not play a role; the risk premium is zero. The risk-averse only makes decisions under security , where its expected benefit corresponds to the utility value of a secure deposit, which is lower than the utility value ( positive risk premium ). The risk-taker preferably makes decisions under risk , the expected benefit and the benefit of a secure deposit only being the same if the risk-free payment is greater than the expected value of the insecure payment ( negative risk premium ).

The attitude to risk in banking and insurance is of great importance . Credit institutions must that of private investors be entered into financial risk of an investment in a suitability statement prior to the conclusion of a security order in accordance with § 64 para. 4 WpHG , as confirmed consistent with the risk tolerance of the investor while the asset class and risk category have to be considered. In the insurance market , the risk attitude of a potential policyholder is important, whether and to what extent he is willing to subject an existing risk to insurance cover or not. A risk-averse customer will only be willing to take a insurance premium to pay, under the expected value of the damage is: a risk-averse is willing to pay a higher than expected value premium: while a risk-neutral economic agent will be willing to spend an insurance premium exactly the expected value of the risk corresponds to: . The expected value of the damage ( ) is the decision parameter for the policyholder. ${\ displaystyle V}$${\ displaystyle E_ {w}}$${\ displaystyle V ${\ displaystyle V> E_ {w}}$${\ displaystyle V = E_ {w}}$${\ displaystyle E_ {w} \ cdot probability of occurrence}$