Risk aversion
Preferring a sure thing to a gamble of equal or even higher expected value.
What it means
Risk aversion is the tendency to prefer a certain outcome over a risky prospect with the same or greater expected value, so that one would accept a lower guaranteed amount rather than face uncertainty. In expected-utility theory it is explained by a concave utility function — diminishing marginal utility of wealth means the pain of a possible loss outweighs the pleasure of an equal possible gain, so the expected utility of a gamble falls below the utility of its expected value. The gap between the expected value and the smallest certain amount a person will accept instead is the risk premium, the price they pay for certainty. Prospect theory refines the picture: people are risk-averse for gains but risk-seeking for losses (the reflection effect) and for low-probability large gains they turn risk-seeking, so risk attitudes flip with framing and probability rather than being a single trait. It matters for insurance, investing, the equity premium, and any choice under uncertainty, and its mirror image, risk seeking, is equally consequential.
Examples
Most people take a guaranteed $50 over a 50-50 chance at $110, forgoing higher expected value to avoid the risk of getting nothing.
A shopper pays £60 for a three-year warranty on a £400 washing machine, buying certainty at a price set comfortably above what the repairs are likely to cost.
Offered a job with a lower salary but big commission upside, a candidate takes the steady fixed-pay role instead, accepting less on average for a payslip she can predict.