Managerial Economics and Strategy, 2/e

14.2 Attitudes Toward Risk

Given the risks Gregg faces if he schedules a concert, will Gregg stage the concert? To answer this question, we need to know Gregg’s attitude toward risk.

Expected Utility

If Gregg did not care about risk, then he would promote either an indoor or an outdoor concert based on which option had a higher expected value (profit) regardless of any difference in risk. However, like most people, Gregg cares about risk as well as expected value. Indeed, most people are risk averse—they dislike risk. They will choose a riskier option over a less risky option only if the expected value of the riskier option is sufficiently higher than that of the less risky one.

We need a formal means to judge the trade-off between expected ...