Do you want to play this gamble?
If yes, then you are risk-preferring.
If no, then you are risk-averse.
If you are indifferent, then you are risk-neutral.
That is because the expected value of the gamble is £0 (100x0.5 + -100x0.5 = 0).
Personally I would not like this gamble, which makes me risk averse. The extent of my risk averseness would have to be revealed by considering different gambles, but as long as I am consistent in my attitude to risk an economist could call me rational.
Here are a copuple of other interesting gambles which may shed light on your attitude to risk:
I am about to toss a fair coin. If heads you win £100. If tails you lose £75. Do you want to play?
I am about to toss a fair coin. If heads you win £1000. If tails you lose £50. Do you want to play?
If you would not like to play these gambles then you highly risk averse... Personally I think I would probably play both, definitely the latter one.
Had you considered the fact that some people simply don't like to gamble? The word G-A-M-B-L-E has negative connotations for some. In other areas of risk, a gambling-averse person might be strongly risk-preferring. To the economist, such behaviour might be considered irrational, but to the layman it is highly rational if it is based on a consistent set of morals.
ReplyDeleteThat is a very good point. Some people simply refuse to gamble (for legit reasons). I argue that economics experiments are different as you do not gamble your own money and you 'win' money that has been set aside by economists to be won by subjects. Sadly, I have no money to run experiments, and explain them in the way most easily understood.
DeleteRisk is something we encounter every day, and we encounter it all the time when it comes to our money (decisions to spend, borrow or save). Understanding how people behave to risk is important. Using 'gambles' or 'lotteries' is a simple way to understand basic behaviour. Although, as you say, not everyone will behave in the same way in an experiment using 'gamble' as they would in real life.