Some Models of Financial Decisions

Abstract: The article is devoted to risk modeling in prudent operators or investors, whose decisions are characterized by a trade-off between loss risk and reproduction function. Their attitude may be covered by the combined use of quantitative risk measures. Show the approach to risk modeling, which we will move to the traditional theory of maximizing the possibility of using service functions. Investors who engage their capital are always at risk because they make changes in the structure of their assets when investing. The risk of investing is identified with a possible threat or chance of achieving the expected benefits and is associated with the risk of an investment effect not being expected. This effect may be worse or better than previously assumed. The need to identify and verify the risk results from the possibility of achieving the expected benefits of the investor or avoiding losses. When making investment decisions, we can distinguish three types of investor behavior: Preference for risk and its effects (gambler) — the investor makes decisions even when the probability of loss exceeds the probability of profit. The investor is willing to incur higher expenses in order to make a decision about a higher risk. Risk neutrality — the investor does not make decisions when the probability of making a profit is too low. When making decisions, the investor does not pay attention to the amount of risk. Risk aversion — the investor expects the probability of profit to be greater than loss. An investor takes a risk when he expects to receive bonus compensation. Risk aversion also depends on the investor’s resources. The richer the investor, the easier it will be for him to accept the loss. The models described in the article assume that investors act rationally and are characterized by risk aversion.

Key words: utility function, risk, certainty equivalent, risk aversion

JEL codes: G