# Risk Aversion

Source: https://www.yieldcurve.pro/learn/risk-aversion

**Risk aversion** quantifies how much an investor dislikes uncertainty. A highly risk-averse investor demands a large premium to accept volatility; a less risk-averse investor will tolerate more volatility for a smaller increase in expected return.

In portfolio theory, risk aversion is parameterized as a coefficient (often denoted *γ*) in the investor's utility function:

- **Low risk aversion** (γ ≈ 1-2): tolerates large drawdowns; allocates heavily to equities
- **Moderate risk aversion** (γ ≈ 3-5): the range assumed in most academic models and target-date fund design
- **High risk aversion** (γ ≈ 7+): prioritizes capital preservation; allocates heavily to short-duration bonds

Risk aversion determines the optimal mix between risky assets (equities) and safe assets (Treasury bonds). For a given set of expected returns, volatilities, and correlations, a more risk-averse investor holds a lower equity weight. This is the core input to [asset allocation](https://www.yieldcurve.pro/learn/asset-allocation) decisions.

Empirical evidence suggests risk aversion is not constant — it varies across individuals, changes with wealth, and shifts with age. The [lifecycle investing](https://www.yieldcurve.pro/learn/lifecycle-investing) framework accounts for this by recognizing that the ability to recover from losses (via future labor income) effectively lowers the risk aversion relevant for portfolio decisions among younger investors.