Risk Aversion

Risk aversion is rational and is the reason risky assets must offer a premium — nobody would hold equities over government securities without the prospect of a higher return. It differs from loss aversion, which is about the asymmetry between gains and losses rather than about preferring certainty. Prospect theory shows that people are risk averse over gains and risk seeking over losses, so the same person exhibits both depending on the reference point. The practical question is not whether to be risk averse but whether the degree matches the horizon: excessive risk aversion over thirty years is its own risk, since inflation is certain.