57.1 Risk Preference Curves

A straight-line risk-preference curve represents a decision maker who is risk-neutral. This type of decision maker bases decisions on expected values rather than certainty equivalents.

A risk-averse decision maker will have a curve with a decreasing slope, meaning that certainty equivalent is less than expected value. The curve will typically be steeper in the low value range, where aversion to risk is weak, and will grow progressively flatter as the values get larger (both positive and negative), where aversion to risk becomes stronger. The more risk-averse you are, the more your curve will deviate from the 45° straight line representing risk neutrality.

If you encode a curve that includes some unexpected bumps when graphed, this means that some of your responses were inconsistent. You should repeat the process. Don't be discouraged; developing a meaningful non-constant risk utility curve takes hard thinking and careful consideration.

In your model, you can only use Risk preference functions if the calculation method is set to Simple.