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Economic explanation of risk aversion

R

Rupel

Member
Hey, can anyone please explain how an economic explanation of risk aversion means the marginal utility of an extra unit of income decreases as more income is received. Kindly reply. Thank you.
 
Does is work for you: in any activity there is always an element of risk versus reward. You have to work/ use capital to get that extra unit of income, but that means accepting additional risk. There is an opportunity cost. If you have sufficient income to meet need, a risk averse person will be less inclined to accept the extra risk and s marginal utility decreases the higher the income is. In humanistic terms, It's like if I work any harder, I may actually fail altogether eg health wise and so be unable to work/earn hence I wont risk losing all just for that extra £1.
 
bystander said:
Does is work for you: in any activity there is always an element of risk versus reward. You have to work/ use capital to get that extra unit of income, but that means accepting additional risk. There is an opportunity cost. If you have sufficient income to meet need, a risk averse person will be less inclined to accept the extra risk and s marginal utility decreases the higher the income is. In humanistic terms, It's like if I work any harder, I may actually fail altogether eg health wise and so be unable to work/earn hence I wont risk losing all just for that extra £1.
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Thank you very much for your reply. I was able to understand.
 
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