Decision making under uncertainty and risk

Risk means the odds are known; uncertainty means even the odds are unknown. Economists usually analyse risk with expected utility: a person does not maximise expected money, but the expected utility of money. A risk-averse person has a concave utility function — each extra rupee adds less utility than the last — so such a person prefers a certain sum to a gamble with the same expected value. Worked example: a gamble paying 100 with probability one-half and 0 otherwise has expected value 50, but for a person with utility equal to the square root of wealth, expected utility is 5, the same as a certain 25, so the person would accept only 25 for certain instead of the gamble.