Chapter 2. Why Do We Care About Risk?

Do human beings seek out risk or avoid it? How does risk affect behavior, and what are the consequences for business and investment decisions? The answers to these questions lie at the heart of any discussion about risk. Individuals may be averse to risk, but they are also attracted to it, and different people respond differently to the same risk stimuli.

In this chapter, we will begin by looking at the attraction that risk holds to human beings and how it affects behavior. We will then consider what we mean by risk aversion and why it matters for risk management. We will follow up and consider how best to measure risk aversion, looking at a range of techniques that have been developed in economics. In the ...

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