Handbook of Critical Issues in Finance
Show Less

Handbook of Critical Issues in Finance

Edited by Jan Toporowski and Jo Michell

This vital new Handbook is an authoritative volume presenting key issues in finance that have been widely discussed in the financial markets but have been neglected in textbooks and the usual compilations of conventional academic wisdom.
Buy Book in Print
Show Summary Details
You do not have access to this content

Chapter 39: Risk

Tracy Mott


Risk, in economics, has traditionally been taken to be a matter of the variability of a magnitude of wealth or income or of the utility of such a magnitude. To differentiate risk from uncertainty, which also signifies variability, economists have generally followed Frank Knight ([1921] 1985), who defined risk as a situation where the outcomes can be given specific probabilities and uncertainty where specific probabilities cannot be assigned. Knight thus held that risk can be insured against, while uncertainty cannot. A situation where either risk or uncertainty, as so defined, exists, however, cannot be one of certainty, so one might ask whether Knight’s distinction is one of degree or difference. Taking risk to be variability has quite naturally led economists to measure risk by the standard deviation or by the variance of the distribution of the relevant variable. This has been criticized on the grounds that these measures require a utility maximizer to have a quadratic utility function, which imposes some implausible conditions on an individual, such as greater aversion to constant additive risk at high levels of wealth than at low levels of wealth, which contradicts observed behavior, and Karl Borch’s (1969) demonstration of an inconsistency in the rank-orderings generated by the mean-standard deviation approach.

You are not authenticated to view the full text of this chapter or article.

Elgaronline requires a subscription or purchase to access the full text of books or journals. Please login through your library system or with your personal username and password on the homepage.

Non-subscribers can freely search the site, view abstracts/ extracts and download selected front matter and introductory chapters for personal use.

Your library may not have purchased all subject areas. If you are authenticated and think you should have access to this title, please contact your librarian.

Further information

or login to access all content.