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Firstly, Culp (2001, P. 15) Offers What He Terms The Event-driven Definition ...


Firstly, Culp (2001, p. 15) offers what he terms the event-driven definition of risk which works on the principle of the type of event that can result in a loss, such as a flood or earthquake. The second type of risk Culp (2001, p. 16) defines is ‘market risk' that arises from the event of a change in some market determined asset price, reference rate or index. He explains that ‘delta represents the value that is the exposure that deteriorates as a result of the price, or value of some risk factor changes, with ‘gamma' as the risk that delta will change when the value of an underlying risk factor changes and ‘rho as the risk that the interest rates used to discount future cash flows in present value calculations will change and impose unexpected losses on the firm (Culp, 2001, p. 17). Culp (2001, p. 18) defines ‘liquid risk' as that which occurs in the event that cash flows, and current balances are insufficient to cover cash outflow requirements, and ‘credit risk'. The other types of risk Culp (2001, pp. 18-22) defines are ‘operational risk', and ‘legal risk', with other risks representing a broad array of items such as intellectual risk, customer loss risk, and supply chain risks as a few examples.
In equating risk with the subject of this examination, risk aversion represents the division of risk that is associated with individuals. Culp (2001, p. 34) refers to this as . the shape of a utility function dictating the degree to which an individual is risk-averse, risk-neutral, or risk-loving. Barrett (1993, p. 2) states that inside of these risk categories is what he terms the ‘disaster threshold' whereby one engages in behavior that includes risk only when it does not touch their threshold of misfortune beyond which they will not go as such would be experienced as a disaster. He adds that when individuals have a preference for risk-aversion (it) displaces the preference for rational decision making (Barrett, 1993, p. 79). Under this type of thinking the rule is to take as few risks as is compatible with the perception of opportunities, and to expect a corresponding attitude in others (Barrett, 1993, p. 79).
Lane and Cherek (2000) conducted a study on risk-aversion examining the role of contingencies and experimental context in human decision making. They subjected twelve individuals to a series of conditions that provided response alternatives of a small, high-probability reinforcer (non-risky alternative), or a larger, low probability reinforcer (risky alternative). The range of the reinforcer probabilities and amounts were utilized via a discrete trial design that had repeated trials conducted in multiple sessions. In comparing the results with prior data it was found that the subjects in the study displayed a strong preference for the non-risky response alternative, even when doing so resulted in lost earnings (Lane and Cherek, 2000).


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