Is Risk Good or Bad?
The definition of risk used by the HarvestChoice project does not frame risk as inherently bad because individuals often voluntarily subject themselves to risks that can be avoided. That is, some individuals may view risk as undesirable, others may not care, while still others may view it as desirable. Individuals who find risk undesirable are commonly referred to as risk averse. Individuals who do not care are commonly referred to as risk neutral. Individuals who find risk desirable are commonly referred to as risk preferring, loving, or attracted. Therefore, whether risk is good or bad can depend on an individual’s personal preferences. It is also important to note that an individual’s risk attitudes can vary depending on the nature of the risk (e.g., a farmer may be risk averse when it comes to making production decisions, but risk preferring when it comes to playing games of chance).
Sugar beet / © Sieto VerverA simple thought experiment can be used to understand the distinction between these three types of risk attitudes. Suppose an individual has a choice between earning (i) $50 for certain, or (ii) an equal chance at $100 or nothing. Which would the individual choose? Individuals who choose (i) or (ii) will earn $50 on average. The difference is that while every individual who chooses (i) receives $50, some individuals who choose (ii) receive $100, while others receive nothing. Thus, (ii) is characterized by risk, while (i) is not. Individuals who will always choose (i) are risk averse because they always choose the option without risk even though both pay the same on average. Individuals who will always choose (ii) are risk preferring because they always choose the option with risk even though both pay the same on average. Individuals who might choose (i) or (ii) are risk neutral because they do not care whether one option is risky and the other is not provided both pay the same on average.