ABSTRACT
Economic choices are almost always made with some uncertainty as to what the outcome will be. Economists like things simple, and so two utility functions are of particular note because they imply, respectively, constant absolute risk aversion or constant relative risk aversion. Most people are constantly exposed to existing risks because they have money invested in the stock market, might lose their job, have already bought a lottery ticket. The risk inherent in many economic choices, it is important to know the level of risk aversion, even if our primary interest is not how a person reacts to risk. Expected utility does give us, therefore, a very simple and transparent way to model and understand how people make choices when there is risk. Most people are constantly exposed to existing risks because they have money invested in the stock market, might lose their job; have already bought a lottery ticket.
