MODULE 7: RISK ATTITUDES

OBJECTIVES
At the end of the discussion, the students will be able to:
A. demonstrate mathematical and graphical skills in solving computational problems involving expectetudility
theory;
B. classify the different typology of risk-taking attitudes and distinguish each;
C. describe entrepreneurial risk attitudes across populations; and
D. differentiate entrepreneurial risk attitudes set against business start-ups.

What do you think are the risk in engaging

into the business?

INTRODUCTION
Bounded rationality causes risks in human activity. This module examines entrepreneurial attitudes toward
business risk. It examines specifically the research findings regarding the measurement, differentiation and
determination of the impact of risk attitudes on the entry, growth and success of firms. It also discusses the
relationship between risk behaviors and self-efficacy and optimism.

CONTENT
 Entrepreneurial Risk Behavior

Risk plays a big role in the business world, especially for those looking for very profitable business
opportunities. In fact, over half of start-ups are no longer operating after six years, and 75% of entrepreneurs exit
with no equity (Astebro et al, 2014). Despite the risk, many people go into business every year due to risk
tolerance. To link risk to entrepreneurship, Knight (1921) proposed that successful entrepreneurs possess the
ability to measure the probability of the future outcome of risk as opposed to uncertainty where future outcomes
are difficult to determine. For example,

1. Diversification measured by the variance of performance of each alternative reduces real risk. Although there
was a distinction between risk and uncertainty, subsequent conceptualization continued to combine them. Several
models have been developed to predict the level of risk aversion and how it affects the decision to enter the
business. Khilstrom and Laffont (1979) develop a model linking risk aversion to individuals who become
employees and low risk aversion to those who become entrepreneurs.

2. Feng and Rauch (2015) provided simpler forms and extensions of the model. Astebro et al. (2014) developed
the standard expected utility model of risk preference as a function of utility over wealth. The model could predict
that most people have utility functions with risk aversion who prefer to work with low pay than those who prefer
the possibility of huge gains but risky entrepreneurial ventures. Thus, holding other factors constant such as
entrepreneurial ability and financing limitations, the individual's preferences over risk can play a critical role in
determining entrepreneurial entry decisions. The literature describes attitudes, risk preferences, risk tolerance, risk
aversion, and risk propensity. All usages of the concept attempt to answer whether something in an individual's
personality predisposes them to take on the risky conditions of entrepreneurship and the impact of this personality
trait on outcomes.

Methods of Measuring Risk Attitudes

One way to measure risk attitude is through self-assessment. In most cases, the questions asked to vary
depending on the level of specificity, because many of them come from longitudinal surveys not suited to
entrepreneurship (Kerr et al., 2017). As a result, they do not entrepreneur-specific attitudes towards the real risk.
For instance, using GSOEP panel data, Caliendo et al. (2009) include the general risk-attitude question; Ekelund
et al. (2005) used indirect questions about general risk attitudes; and Block et al. (2015) use a self-scoring
question. The most obvious problem of self-reported risk-aversion measures is that an individual has incomplete
knowledge of oneself, about his/her own unique psychology relative to Hence, highly prone to response bias. For
instance, entrepreneurs are frequently found to be overconfident (Ästebro et al., 2014), possibly skewing self-
reported results, possibly in cases of the lower-risk decision but pessimistic in a high level of risk decision-
making. In addition, general attitudes may not specify attitudes toward the start-up processes, as one's risk attitude
toward investing in an asset could be unrelated to one's risk attitude toward one's financial career. Some
researchers use company-specific assumptions to measure risk attitudes.

Other researchers use self-confidence or self-knowledge to look at entrepreneurs' investment portfolios

and evidence of activity that may indicate their risk attitudes. There are wide and varied questions ranging from
general financial risk-taking and more entrepreneurship-specific settings. Likewise, situational questions may
elicit disposition toward risk propensity in business venturing and are more reliable than general risk attitude
questions from self report surveys. Similarly, at the firm level, Hall and Woodward (2010) used a model-based
approach to back out what the relative risk aversion of an entrepreneur has to be for a wealth level and external
guaranteed earnings option, given the wide distribution of exit outcomes.

SAQ 1: Identify a Major type of risk attitudes?

Expected Utility Model and Risk Aversion

Expected Utility Theory

- describes situations where individuals must decide
without knowing which outcomes may result from that
decision, i.e., decision making under uncertainty. In
expected utility models, individuals will choose the
action that will cause the highest expected utility,
which is the sum of the products of probability and
utility overall outcomes.

A popular risk model in economics is the

expected utility hypothesis used as a guide for
evaluating decisions involving uncertainty. This model
shows that the utility of money does not equate to the
total value of money but to the level of risks. For
example, the reasons why people may buy insurance policies to
As shown in Figure 1, the decision made will
cover themselves against a variety of risks. The expected value
depend on the person's risk aversion level
from paying for insurance would be to lose out monetarily, but,
and the utility.
the possibility of huge losses could lead to a serious decline in utility because of diminishing marginal utility of
wealth. Although the expected utility hypothesis is standard in economic modeling, largely because of its
simplicity and convenience, it has been found to violate some psychological experiments (Kerr et al., 2017). For
many years, psychologists and economic theorists have been developing new theories to explain these
deficiencies. Given a choice between more risky and less risky investments with identical expected monetary
returns, a risk averter selects the less risky investment and a risk seeker selects the riskier investment. Faced with
the same choice, the risk-neutral investor is indifferent between the two investment projects. Some individuals
prefer high-risk projects and the corresponding potential for substantial returns, especially involving relatively
small sums of money. Entrepreneurs, innovators, inventors, speculators, and lottery ticket buyers are all examples
of individuals who sometimes display risk-seeking behavior. Risk-neutral behavior is common in some business
decision-making. However, most managers and investors predominantly risk averters involving substantial
monetary amounts. Figure 1 shows the hypothetical utility function of risk averse, risk-neutral, and risk seeker
respectively.
 Risk Attitudes of Entrepreneurs VS Other Population

Studies compare the risk attitudes of entrepreneurs to managers in the same industrial sectors, the general
population, and other groups of entrepreneurs with different skill levels and motivations. Lazear (2005) used a
large sample of over 5,000 graduates and found a variation of industry-level earnings among the first job selected-
is positively correlated with the probability of later entering entrepreneurship (earning is a control variable given
the breadth of skill sets important for entrepreneurship). Since earning has confounded the relationship between
skills, motivation, and entrepreneurial entry, a need to re-establish the relationship between the independent and
dependent variables. Using a very different approach, Hall and Woodward (2010) find that entrepreneurs must
have a relatively high-risk tolerance. Evidence shows risk attitudes of entrepreneurs versus business managers are
inconclusive. While it is straightforward to understand why entrepreneurs may be more risk-tolerant than
managers, some argue that other attributes, like the high need for achievement that both groups possess, equalize
or obscure the simplest predictions (e.g., Atkinson, 1957). In a meta analysis of 14 studies, Stewart and Roth
(2001) find that the risk propensity of entrepreneurs is greater than that of managers. This conclusion contradicts
with Miner and Raju (2004), who present data from 14 other studies by means of projective techniques to measure
risk preferences rather than self-report measures. They find entrepreneurs are more risk avoidant than managers.

Other studies avoid the influence of self-confidence and self knowledge gap by looking directly at the
showed investment metrics of individuals and firms or other behaviors that would reveal risk preferences (e.g.,
Puri and Robinson, 2007; Brown et al., 2006; Uusitalo, 2001). For instance, on the individual level, Hvide and
Panos (2014) measured risk preference through stock market participation, personal leverage, and the fraction of
wealth invested in the stock market. Lazear (2005) used the standard deviation of industry-wide earnings in the
individual's first job to measure how willing the person is to tolerate earnings-related risk. At the firm level,
Caggese (2012) used expenditure behavior to measure risk attitudes with the assumption that research for
introducing new products is riskier than investing in improving existing products. Xu and Ruef (2004) further
examined the "myth of the risk-tolerant entrepreneur."

They compared the risk attitudes of entrepreneurs to the general population, using PSED data to analyze
the reactions of 1,261 nascent entrepreneurs and general population participants in a series of business investment
decisions. They used two models, "strategic" model of risk tolerance based on investment choices, which captures
situational risk tolerance in taking a specific strategy or executing a specific action. The other is a "non-strategic"
model of risk tolerance based on information bias about business success, which captures pre-dispositional risk
tolerance. The researchers concluded that the PSED entrepreneurs are significantly more risk-averse than the
general population, proposing that risk-averse individuals enter highly risky endeavors mostly because they value
"identity fulfillment" and their autonomy more highly than any pecuniary benefits.

Other researchers measure heterogeneity within entrepreneuri al groups. Both Stewart and Roth (2001)
and Miner and Raju (2004) find that there are large differences between entrepreneurs whose primary goal is
venture growth versus those whose focus is on producing family income. Block et al (2015) expanded the distinc
tions by comparing opportunity and necessity motivations among asking participants to show their willingness to
take risks regard a sample of 1,526 entrepreneurs through an email questionnaire ing start-ups and the amount
they would invest in a hypothetical investment lottery. The study finds that opportunity entrepreneurs are more
willing to take risks than necessity entrepreneurs, and those with motivation by creativity are more risk-tolerant
than other entrepreneurs. In summary, while the literature on entrepre neurial risk attitudes is sizable and growing,
no uniform consensus on how risk preferences should elicit and how they differ between populations. Perhaps a
new and more complete synthesis lurks around the corner, but progress to such an end is not clear in recent
studies. This needs more work to redefined populations to better understand risk aversion among entrepreneurs.
This also requires further exploration of differences between actual risk taken on by entrepreneurs and the
perceptions of the risk they hold (e.g., Palich and Bagby, 1995). It is not entirely clear whether risk attitudes can
be separated from over-optimism and overconfidence in measure ment, a distinction that is meaningful
theoretically (Parker, 2009).

Effect of Risk Attitudes in the Start-up Process

A large literature looks at the impact of entrepreneurial risk attitudes on the likelihood of starting a
venture and on the eventual success. Cramer et al. (2002) considered 1,500 individuals from 1952, 1983, and
1993 allowing for a long time span for entrepreneurial choices to come about. While the study found evidence
that risk aversion reduces entrepreneurial entry, the researchers did not feel confident enough in the link to deem
it a causal relationship. In a very different setting, Gürol and Atsan (2006) administered a random sample of 400
fourth-year university students who intend to start their own business ventures show higher risk-taking propensity
than non-inclined students. Similarly, using the income gamble questions, Ahn (2010) found that relative risk
tolerance has a large, positive, and statistically significant effect on the probability of entering self-employment.
An individual with a higher level of risk tolerance is more likely to enter self-employment. Brown et al. (2011)
used 14,305 observations from the Panel Study of Income Dynamics, find that willingness to take financial risk
correlates positively with future self-employment. Other international studies include Ekelund et al. (2005), which
analyze psychometric data from the Birth Cohort Study. They find that harm avoidance carries a negative effect
on the individual's probability of being self-employed. Caliendo et al. (2009) observed in the GSOEP that
individuals with lower risk aversion are more likely to become self-employed if they are coming out of regular
employment, but risk aversion does not explain entry for those coming out of unemployment or inactivity. Across
the studies, the weight of the evidence suggests that individuals with greater risk tolerance are more likely to enter
entrepreneurship, but same measures of risk aversion for different populations of potential entrepreneurs and
comparison groups should be further examined which are more directional than quantitative. The realities of
business venturing (and subsequent rates of failure) make it quite reasonable that a would-be entrepreneur needs
to be one who can tolerate a lot of risks, but it is very important to consider various situational factors. For
example, designing unemployment insurance benefits or future universal basic income schemes, would aid
policymakers to have an accurate understanding of the relative degrees of risk tolerance in their population.
Individuals who are risk-tolerant may be more likely to exit unemployment by starting their own business, versus
looking for paid work, if getting small incentives from the government (e.g., Hombert et al., 2017).

Risk Tolerance and Growth and Success Entrepreneur

Contrary to the strong consensus among researchers that risk tolerance favors business creation, it is
unclear whether risk attitudes impact the long-term success of firms. In a meta-analysis of about sixty studies,
Zhao et al. (2010) found that risk propensity is positively associated with early entrepreneurial intentions, but is
not related to entrepreneurial performance (defined through evidence of survival, growth and profitability of the
enterprise at the study level). Similar results are found by Kessler et al. (2012) among founders for assessed
venture success and business survival. Hvide and Panos (2014) hypothesized that the businesses of risk-tolerant
individuals might underperform over the long run, because more of these individuals select into entrepreneurship
(thus bringing more mediocre ideas) than among risk-averse individuals (who thus might only be tempted to start
firms with the very best ideas). The authors gathered an impressive dataset of 400,000 males who were fully
employed in 1993-1994. They identified 6,300 who subsequently became entrepreneurs, defined as having a
majority stake in a new firm incorporated between 2000 and 2007. Investment data show that common-stock
investors, who take on individual financial risks, are about 50% more likely to start a firm, but their firms have
roughly 25% lower sales and 15% lower return on assets during the annual observation period between 2000 and
2010. This type of study represents an important frontier in this area of research.

Korunka et al. (2003) surveyed and compared 314 nascent entrepreneurs and 627 new business owner-
managers and found that those who become successful (self-assessed) displayed a medium risk-taking propensity.
It is possible that while the high risk-takers are not the most successful, some risk-taking propensity is helpful
toward business success. This hypothesis of a non relationship between risk tolerance and firm performance is
worthy of study in larger samples. Hyytinen et al. (2015) used an innovative approach that combines interview
data from an early start-up period with national business register data to track firm survival. Their main interest
was in the firm's innovativeness (rather than that of the entrepreneur) but they also asked about the risk attitudes
of the entrepreneur. They found that risk-loving entrepreneurs that operate innovative firms are much less likely
to have their firms survive over a three-year follow-up period compared to risk-loving entrepreneurs running less
innovative operations.

The main effect for risk-attitude is not significant in the firm survival models without this business model
(i.e., "innovativeness") interaction, while the interacted model displays a positive partial correlation between
entrepreneurial risk preference and firm survival. In contrast, Cucculelli and Ermini (2013) found that firms run
by risk-loving entrepreneurs tend to perform better in their sample of 178 entrepreneurs running Italian
manufacturing firms in 2007. The authors compared firms that introduce new products with those without new
product innovations. Risk attitudes are measured with a hypothetical lottery question, and are then matched with
firm-level product portfolios and other financial data. A separate analysis of risk-averse versus risk-loving
entrepreneurs reveals that the introduction of a new product affects firm growth positively (and significantly) only
in the sample of firms owned by risk-loving individuals. The risk-loving entrepreneurs are also somewhat more
likely to introduce new products in the first place, showing that they may indeed stimulate firm growth through
innovation.

Probability of Existing Entrepreneurship

Caliendo et al. (2010) measured in GSOEP datasets that risk attitudes have a non-relationship with
entrepreneurial survival, as the exit rates of medium risk takers are 40% lower than those for low and high risk
takers. While a positive relationship emerges from the literature regarding risk taking and initial entry into self-
employment, there appears to be a more complex relationship between risk taking and growth/exit choices. These
early results need further verification using data from other countries and different entrepreneurial populations.

Entrepreneurial Self-Efficacy, Risk Attitudes, and Optimism

 Many researchers investigate the relationship between ESE and risk propensity. For example, Zhao et al.
(2005) in a survey sample of 265 MBA students found that the effects of risk propensity (and perceived learning
from entrepreneurship-related courses and previous entrepreneurial experience) is fully mediated by an
individual's ESE. Similarly, Densberger (2014) considered whether risk propensity is a side effect of high ESE. In
49 in-person interviews with entrepreneurs, the author concluded that high ESE allows entrepreneurs to be
comfortable taking risks. Barbosa et al. (2007) took a more complex approach by considering the roles of risk
preference and cognitive style on four types of ESE and entrepreneurial intentions. Surveying 528
entrepreneurship program students in several European countries, they found that high risk-preference students
hold higher levels of entrepreneurial intentions and opportunity identification efficacy.

Meanwhile, individuals with low-risk preference had higher levels of relationship efficacy and tolerance
efficacy. These out comes appear to support claims that higher risk preferences select for entrepreneurial qualities,
while lower risk preferences select for managerial qualities. Researchers also consider that entrepre neurs may
enter the risky world of business venturing because they over-assess their likelihood of positive returns. In a
comprehensive literature review of the topic, Astebro et al. (2014) examined the re lationship between optimism,
overconfidence, and entrepreneurial activity. Optimism refers to a general disposition toward having unrealistic
beliefs in good outcomes, while Astebro et al. (2014) used.

Moore and Healy's (2008) framework of overconfidence as expres sions of overestimation and over-
placement. Overestimation refers to estimating one's abilities to be greater than they really are, while over
placement refers to estimating one's abilities to be greater than they really are relative to another group. Both
versions of overcon fidence appear to encourage people to enter entrepreneurship at higher rates than average, and
they may also encourage people to make riskier decisions. Astebro et al. (2014) pointed out that while it is often
difficult to distinguish between the effects of optimism, overestimation, and over-placement, the effects
psychologically operate on different levels of specificity. Optimism applies to all situations, while overestimation
applies to a set of situations that reference a specific skill, and over-placement applies in a specific situation that
involves a specific reference group, such as a certain market. Because of these differences, Åstebro et al. (2014)
asserted that it is important to understand their distinctions for effective pol icymaking.

Researchers measure the correlation between general optimism and entrepreneurial activity using
different predictive responses to future outcomes. For example, a research question is whether entrepreneur's
optimism is a good predictor overall. Shane (2009) found that entrepreneurs are generally positive in their
performance estimates. Using data from the Global Entrepreneurship Monitor (GEM), Shane found entrepreneurs
believe five times more often than occurs in reality that they will have at least higher sales. In contrast, Bengtsson
and Ekeblom (2014) examined monthly survey data of 153 entrepreneurs and non-entrepreneurs regarding their
beliefs about future nationwide economic conditions that spans 13 years. Comparing forecasts to economic
reality, they noted that entrepreneurs have higher optimism about the economy, but less forecasting error.

However, the forecasting error component of this study may be inconclusive given the economic growth
between 1996 and 2009 generally exceeded expectations of the general public. Additionally, this study compares
entrepreneurs to the general population, who may be less informed about economic trends than entrepreneurs
whose very work requires them to consider economic conditions. The general trend appears to be that while
optimistic people are more likely to enter into entrepreneurship, they make riskier entrepreneurial decisions and
incur greater losses to income. Puri and Robinson (2007) compared self-estimates of life expectancy from the
Survey of Consumer Finance with actuarial tables. Those who overestimate their lifespan are more likely to be
entrepreneurs, and the most optimistic are more likely to make high-risk financial decisions. Landier and Thesmar
(2009) compared French entrepreneurs' own expectations of future income with linked panel data, and found that
overconfident entrepreneurs are more likely to use short-term debt financing. Perhaps due to riskier decision-
making, the optimistic entrepreneurs earn less than pessimistic entrepreneurs. Dawson et al. (2014) compared
earning expectations from the household panel study from 1991 to 2008 with future earnings as an entrepreneur.
Controlling for ability and environmental factors, the researchers reported that optimistic entrepreneurs earn less
than pessimistic entrepreneurs, with the difference being highest at the top of the earning scale and insignificant at
the bottom.

Likewise, it is more difficult to find out whether forecasts stem from general optimism or overconfidence
within a more specific context or a market. Åstebro et al. (2007) attempted to test apart the effects of optimism
and overconfidence by comparing 820 inventor-entrepreneurs with non-entrepreneurs in Canada with two scales-
the forecasting of one's score on a general knowledge test and a general belief that "good things will happen."
Inventor entrepreneurs tend to both overestimate their scores and be more optimistic. The researchers then
compared measures of optimism and overconfidence with data from the Inventors' Assistance Program at the
Canadian Innovation Centre that advised inventor entrepreneurs to either end efforts or continue through with
launch. While overestimation does not affect investment of time and money, optimism increases expenditures of
time and money even when prospects are said to be limited. Entrepreneurs may enter competitive markets with a
small chance of venture success for overestimation of their own abilities vis-à-vis competitors or because they
simply enjoy competitive environments.

Camerer and Lovallo (1999) presented a scenario to university students in which pay depends on rank.
When asked whether they would like to receive their rank randomly or based on performance on a trivia quiz,
those with high estimations of their abilities are more likely to select the trivia quiz. Interestingly, Holm et al.
(2013) used a similar approach and found that Chinese entrepreneurs are more likely to enter skill-based
competitions even if they do not over place themselves, suggesting that entrepreneurs may be drawn to
competition regardless of overconfidence. Bernardo and Welch (2001) describe herding behavior for
entrepreneurship. In conclusion, research provides clear hypotheses why entrepreneurs are optimistic and
overconfident, and, why these traits may be deleterious for entrepreneurial performance. Overall, while plenty of
room remains for further inquiry and sharpening of results, this part of the literature is more developed and
cohesive than many other areas of entrepreneurial characteristics research.

General Summary of the Research Findings

Results showed mixed results. Entrepreneurs are more open to experience, conscientious, and extraverted
than the average populations while other studies revealed that entrepreneurs are less conscientious, agreeable, and
extraverted. The levels of openness to experiences relate positively with the levels of entrepreneurial intention.
Entrepreneurs have higher self-efficacy in innovation and risk-taking while innovativeness correlates with the Big
Five personality traits. Higher ESE correlates positively with the likelihood of nascent entrepreneurs to operate
and succeed in business. Extensive findings support the relationship between locus of control and innovativeness,
entry, growth, and success. High need for achievement predicts entry into entrepreneurship and varies across
cultures. In some studies, entrepreneurs have risk tolerance but risk-averse in other studies. There is extensive
support that entrepreneurs have higher risk tolerance than managers and general populations.
 However, the findings are incongruous on account of the lack of consensus on how to measure risk
preferences. Studies involving students revealed that higher risk tolerance has a higher positive effect on the
probability of entry into the entry of entrepreneurship. Students with the greater weight of evidence that high-risk
tolerance is more likely to enter entrepreneurship. Higher risk tolerance is likely to succeed and operate in
innovation firms and perform better. Risk attitudes have no relationship with entrepreneurial survival. There
appear to have a complex relationship between risk-taking and growth and exit choices. For MBA students, ESE
fully mediates with risk propensity. Higher risk preferences hold higher levels of entrepreneurial intentions and
opportunity identification. Opportunistic individuals are more likely to make risky entrepreneurial decisions.
Optimistic entrepreneurship earns less than pessimistic people. Entrepreneurs are optimistic and confident but
deleterious to the business.

SAQ # 2: Define risk in term of economics.

SUMMARY
 The findings are incongruous on account of the lack of consensus on how to measure
risk preferences. Studies involving students revealed that higher risk tolerance has a higher
positive effect on the probability of entry into the entry of entrepreneurship. Students with the
greater weight of evidence that high-risk tolerance is more likely to enter entrepreneurship.
Higher risk tolerance is likely to succeed and operate in innovation firms and perform better.
Risk attitudes have no relationship with entrepreneurial survival. There appear to have a
complex relationship between risk-taking and growth and exit choices. For MBA students, ESE
fully mediates with risk propensity. Higher risk preferences hold higher levels of
entrepreneurial intentions and opportunity identification. Opportunistic individuals are more
likely to make risky entrepreneurial decisions. Optimistic entrepreneurship earns less than
pessimistic people. Entrepreneurs are optimistic and confident but deleterious to the business.

REFERENCE

Fitzsimmons, J.R., Douglas, E.J. (2005), "Entrepreneurial Attitudes and Entrepreneurial Intentions: A Cross-
Cultural Study of Potential Entrepreneurs In India, China, Thailand And Australia", Babson-Kauffman
Entrepreneurial Research Conference, Wellesley, MA.

ASSIGNMENT

ESSAY

Describe a person who is risk neutral.

NAME:____________________________________________ DATE:_________________________________
COURSE & SEC.:___________________________________ INSTRUCTOR:__________________________

ASSESSMENT

SAQ #1: Identify a major type of risk attitudes?

 Risk Seeker
 Risk Averser
 Risk Natural

SAQ #2: Define risk in terms of economics.

 Risk is defined in financial terms as the chance that an outcome or investment's

actual gains will differ from an expected outcome or return. Risk includes the
possibility of losing some or all of an original investment.
NAME:____________________________________________ DATE:_________________________________
COURSE & SEC.:___________________________________ INSTRUCTOR: JAZY MAE P. CUADRO, LPT

TEST

MULTIPLE CHOICE

1. Which of the following is/are one of the three major types of risk attitudes?
I. Risk Avers
II. Risk Basic
III. Risk Negative

a. I only
b. I, II, and III
c. II and III
d. III only
2. In economics, what is risk?
a. Uncertainty
b. Something terrible
c. Certainty
d. Safety
3. A person who is risk neutral is__________________.
a. Indifferent about risk
b. Happy to take on a lot of risks
c. Avoids risk most, but not all, of the time
d. Only going to take on certain events
4. A situation in which a decision maker knows all of the possible outcomes of a decision and also knows
probability associated with each outcome is referred to
a. Certainty
b. Risk
c. Uncertainty
d. Strategy
5. Which of the following methods selecting a strategy is consistent with risk averting behavior?
a. If two strategies have the same expected profit, select the one with the smaller standard deviation.
b. If two strategies have the same standard deviation, select the one with the smaller expected profit.
c. Select the strategy with the larger co efficient of variation.
d. All of the Above
6. Which of the following does measure risk?
a. Coefficient of variation
b. Standard Deviation
c. Expected Value
d. All of the above measure risk
7. If a person’s utility doubles when their income doubles, than that person is risk
 a. Averse
b. Neutral
c. Seeking
d. There is not enough information given in the question to determine an answer
8. The coefficient of variation measures
a. The risk per unit of expected payoffof risk
b. A decision maker’s risk-return trade off
c. The risk-adjusted expected value
d. The payoff per unit
9. Circumstances that influence the profitability of a decision are referred to as _____________________.
a. Strategies
b. A payoff matrix
c. States of nature
d. Marginal Utility of money
10. The marginal utility of money diminishes for a decision maker who is________________________.
a. A risk seeker
b. Risk neutral
c. Risk averse
d. In a situation of uncertainty