Risk Avoidance and Risk Taking under Uncertainty: A Graphical Analysis

Abstract

Using a graphical approach, we characterize explicitly variations in optimizing behavior from risk avoidance (e.g., insurance buying) to risk taking (e.g., “gambling”) in terms of risk preferences, market insurance terms, and exogenous changes in endowed incomes. An individual who is a “risk avoider” at one income position may become a “risk taker” at another income position. Moreover, both low- and high-income risk-averse individuals may engage in risk-taking activities at the same time. These results imply that predictions about attitude towards risk cannot be made independently of income positions or economic opportunities.