Risk aversion
Daniel Bernoulli, a famous mathematician. proposed a theory of utility in 1-38 that distinguished between price and value. where price is equal for everyone but value (utility) depends on the individual making the estimate and their circumstances.
Bernoulli’s approach defined a concept of diminishing marginal utility, which indicates that as wealth becomes greater, then the preference for more wealth diminishes. In the lower left part of the chart, where the investor has a Small net worth, the likelihood of accepting risk is much higher. although the magnitude of the risk is still small. When risk becomes greater, even proportional to rex., ard. all ins estors become cautious. Bernoulli’s graph shows the curve beginning at zero and mov ing up and to the right in a perfect 1/4 circle, ending horizontally, where risk is no longer attractive. This implies that people are risk-averse. Most people are not interested in an ev en chance of gaining or losing an equal amount. Other theories that have been proposed are that tile market maximizes the amount of money lost. and the market maximizes the number of losing participants. All of these concepts appear to be true and are very significant in developing an understanding of how the market functions.