Why Risk Aversion Isn't
Clear--but almost entirely unrelated to what the Theory of Relativity actually says.
Economics has similar problems with terms such as efficiency and competition. One particularly serious case is risk aversion. It is serious because outsiders are not the only ones who think they understand it and don't.
Risk aversion sounds as though it means aversion to risk; one would expect a risk averse person to avoid dangerous hobbies, a risk preferring person to be drawn to them. It is not true. There is nothing in the definition of risk aversion that implies that a risk averse person is less likely to take up hang gliding or mountain climbing than a risk preferrer.
The definition of risk aversion, as any good textbook that covers the subject will explain, is that a risk averse person, faced with the choice between an uncertain set of monetary payments and a certain payment with the same expected value, will prefer the latter. As that definition suggests, it is a statement not about his taste for risk but about his taste for money.
To see why we would expect people to be risk averse, imagine that you are faced with two possible jobs. One pays you $60,000/year. The other has equal odds of paying you $20,000/year or $100,000 year.
We expect most people to prefer the former job, all else being equal. To see why, imagine that you are shifting continuously from it to the other. You are giving up dollars in the future where you lose the bet—where the salary is $20,000—in order to get dollars in the future where you win the bet. That means that you are giving up (probabilistic) dollars used to buy things you would get as your income increased from $20,000 to $60,000 in order to get (probabilistic) dollars to buy things you would get as it increased from $60,000 to $100,000. As your income increases, you buy the more important things first, so we would expect the gain from getting a dollar at the high end to be less than the loss from losing one at the low end. As this (entirely conventional) exposition shows, risk aversion is simply declining marginal utility of income.
The fact that your marginal utility of income decreases as your income increases tells us nothing at all about how the marginal utility of other things changes as the amount you have of them changes, hence the fact that you are risk averse does not tell us what your attitude will to risk that involves non-monetary payoffs.
Your doctor calls you into his office to give you some very bad news. You have been diagnosed with a disease that, if untreated, will kill you in fifteen years. There is an operation which will let you live thirty years--but half the time it instead kills the patient. You have a choice of a certainty of fifteen years or a fifty/fifty gamble between thirty and zero.
As it happens, the one thing in life you most want to do is to produce and bring up children. Thirty years is long enough to do that; fifteen is not. You grit your teeth and sign up for the operation. You are risk preferring in years of life, because years of life have increasing marginal utility to you. You may be, probably are, risk averse in dollars because dollars have decreasing marginal utility to you.
Risk preference, as economists use the term, is not about risk.