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Risk Aversion: Definition, Examples and Effects

Updated: Jun 2

Risk Aversion is the tendency to prefer a sure outcome over a gamble with a higher expected value. It is a form of behavior that is driven by the fear of potential losses. People who are risk averse tend to be more conservative in their decision-making and prefer to stick with the status quo.

Examples: Risk Aversion can be seen in many different areas of life. For example, an investor may be risk averse and choose to invest in low-risk stocks and bonds rather than taking a chance on a high-risk venture. A consumer may be risk averse and choose to buy a reliable car rather than taking a chance on a new model.

Effects: Risk Aversion can have both positive and negative effects. On the positive side, it can help people avoid taking unnecessary risks and minimize the harm of risky decisions producing poor results. On the negative side, it can lead to missed opportunities and a lack of innovation. Risk Aversion can also lead to a lack of diversity in decision-making, as people may be unwilling to take risks on new ideas and solutions.

Do you want to expand your knowledge on this topic? Read our full in-depth article on cognitive biases.

Do you have extra 15 minutes today? Take our fun and interactive quiz to learn which of 16 reasoning styles you use, your overall level of rationality, and what you can do now to improve your rationality skills.

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