Risk attitude determines how an investment’s value differs from its expected payoff

Evidence

Sprenkle then argued that this expected value would be a warrant’s value to an investor only if the investor was indifferent to risk or “risk neutral.” To get a sense of what this means, imagine being offered a fair bet with a 50 percent chance of winning 1,000 and a 50 percent chance of losing 1,000, and thus an expected value of zero. If you would require to be paid to take on such a bet you are “risk averse”; if you would pay to take it on you are “risk seeking”; if you would take it on without inducement, but without being prepared to pay to do so, you are “risk neutral.” A risky investment is worth exactly the expected value of its payoff only to a risk-neutral investor. It is worth less than that to a risk-averse investor, and more than that to a risk-seeking one. — Donald MacKenzie, An Engine, Not a Camera, 534

Categorization

• DEFINE: Clear definitions distinguishing risk-neutral, risk-averse, and risk-seeking via the canonical fair-bet thought experiment.
• XREF: connects to: Prospect theory shows risk attitudes shift with gain or loss framing — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1199; Traders’ risk behavior hinges on anticipated bonus reference points — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1200; People are risk-averse in gains but risk-seeking in losses — John T. Jost and Jim Sidanius, Political Psychology, 2406 (+7 more)

Broader Connections

• Prospect theory shows risk attitudes shift with gain or loss framing #expands (0.85) — Donald MacKenzie, An Engine, Not a Camera, 1199
• People are risk-averse in gains but risk-seeking in losses #expands (0.85) — John T. Jost and Jim Sidanius, Political Psychology, 2406
• Risk-neutral valuation yields the identical option price as arbitrage arguments #qualifies (0.85) — Donald MacKenzie, An Engine, Not a Camera, 1285
• Traders’ risk behavior hinges on anticipated bonus reference points #exemplifies (0.80) — Donald MacKenzie, An Engine, Not a Camera, 1200
• Framing a decision shifts the reference point and thereby changes risk preference #corroborates (0.80) — John T. Jost and Jim Sidanius, Political Psychology, 2415
• Prospect theory predicts risk preferences for non-monetary attributes too #expands (0.80)
• Derivatives do not reflect risk but actively produce contingencies and value #contradicts (0.70) — Aris Komporozos-Athanasiou, Speculative Communities, 390