An agent is said to be risk averse only if he assesses:
A) an outcome's certainty equivalent to be greater than its expected value.
B) the expected value of an outcome to be negative.
C) an outcome's expected value to be equal to its certainty equivalent.
D) an outcome's certainty equivalent to be less than its expected value.
E) an outcome's certainty equivalent to be negative

Question

Quizplus · Accepted Answer

Risk aversion means an agent prefers a certain outcome over an uncertain one with the same expected value. This means the agent's certainty equivalent (the guaranteed outcome that the agent considers equivalent to the uncertain outcome) is less than the expected value of the uncertain outcome. Therefore, D is the correct answer.

An Agent Is Said to Be Risk Averse Only If