Will a risk-averse decision maker ever really prefer an unfair gamble?

Article Abstract:

Managers who are willing to face risks tend to get involved in highly-uncertain gambles provided that such events present a number of prizes or benefits. To assume that risk-averse individuals are predisposed to engage in high-risk activities is refutable since differentiable functions do not exist in conditions where unfair gambles and risk-aversion prevail. Further, the tendency to engage in risks when high prizes are at stake is merely a manifestation of rational behavior.

Methods, Analysis, Unfair competition (Commerce), Unfair competition

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Will a risk-averse decision maker ever really prefer an unfair gamble? Sometimes, he will

Article Abstract:

The assumptions made by Ira Horowitz regarding the tendency of risk-preferring individuals to engage in gambles are refutable since they violate the Lemma 4 of the original research. The work, made by Prakash, Chang, Hamid and Smyser, strictly considers conditions wherein utility functions are characterized by risk aversion and skewness preferences. This restriction implies that solutions may only be generated from specific utility functions for a given level of wealth.

Evaluation

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Why a decision maker may prefer a seemingly unfair gamble

Article Abstract:

Risk-averse managers who demonstrate a preference for positive skewness may enter into high risk projects that appear to be unfair gambles if the payoffs exhibit a skewed distribution. This concept appears to be contrary but is actually consistent with utility theory. Moreover, since such individuals require a lower minimum return, they are more prone to accept high-risk projects than managers who do not have a preference for positive skewness.

Capital Budgeting, Decision-making, Decision making, Risk (Economics), Utility theory, Utility functions, Capital budgets

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