> customers are > typically more motivated to make a decision that avoids potential losses > than brings them potential gains, in other words "fear trumps greed". (I > believe this is actually a fairly well researched topic in behavioral > economics, Von Neumann and a colleague showed many years ago that, given certain fairly weak and (to many people) reasonable assumptions, any rational decision maker acts as if he/she has a utility function and makes decisions by maximizing expected utility. This utility function assigns a numeric value to every possible condition. If the only condition you are considering is wealth in dollars, then most people tend to have a concave (negative second derivative) utility function. This is the technical definition of being "risk averse." As an example, suppose there is a person named Charlie who has the following concave utility function: * * * * A B C D A = Lose $1000; B = Lose $500; C = No change; D = Gain $1000. The vertical axis is utility, the horizontal axis is wealth. Now imagine that Charlie must choose between two actions whose anticipated outcomes may be summarized as follows: 1. A certainty of losing $500. (B certain.) 2. A 50% chance of gaining $1000 and a 50% chance of losing $1000. (Either A or D occurs, with equal probability.) A quick glance at the graph verifies that the average of the utilities of A and D is equal to the utility of B. Thus Charlie has no preference between a guarantee of losing $500 and a fair gamble of $1000. Now, suppose we add a third possibility: 3. A certainty of losing $Z, where Z < 500. Charlie obviously prefers (3) to (1), and he is indifferent between (1) and (2), so Charlie prefers a CERTAINTY of losing any amount of money less than $500 to a 50/50 chance of gaining or losing $1000. This is why we say that a person with a concave utility function is risk averse -- he will actually pay to avoid a fair gamble.