15 Risk Aversion a third Definition

This video introduces the concept of the certainty equivalent as a third definition of risk aversion. We explore how a risk-averse individual compares a lottery to a sure amount of money. The certainty equivalent is the specific sum that makes someone indifferent between receiving that amount for certain and participating in the lottery. We visually demonstrate how this certainty equivalent is always less than the expected value of the lottery for a risk-averse person. This third definition solidifies our understanding of risk aversion through the lens of what individuals are willing to pay for potential gains. Subscribe to @AxiomTutoringCourses for more economic concepts.